May the 4th Be Wtih YouMay 4th is universally recognized (at least in the universe I inhabit) as Star Wars Day. According to Wikipedia, “May 4 is called Star Wars Day because of the popularity of a common pun spoken on this day. Since the phrase “May the Force be with you” is a famous quote often spoken in the Star Wars films, fans commonly say “May the fourth be with you” on this day.” Given the rejuvenation of the franchise, in the form of Star Wars VII – The Force Awakens all Star Wars fans have reason to celebrate this May 4th in a manner we have not seen for some time.

The most recent entry into the Star Wars oeuvre revolves around a young girl, Rey, a scavenger who was abandoned as a child on the desert planet Jakku. She is patiently waiting for her family to return. She is completely self-sufficient and does everything for herself, until she is drawn into the intergalactic battle. It turns out The Force is strong in Rey and at the end of the movie she returns Luke Skywalker’s light sabre to him, strong implying that he is her father. Not so has intoned director J.J. Abrams, who has said publicly that Rey’s father did not appear in Episode VII. Rey is also, as my teenaged daughter informed me, “kick-ass”.

So whether you are waiting for the unfurling of the story of Rey and her family, are cheered by the return of a beloved movie franchise from its putrid depths of Episodes 1-3 or just enjoy a kick-ass, rollicking good time; we all have great reason to celebrate this May 4th.

I thought about all this in the context of the report in the Financial Times (FT) by Richard Milne, in an article entitled “Norway’s oil fund to target high executive pay votes”. Both Matt Kelly and I recently wrote about BP and its Board of Directors’ thumb-nose to its shareholders who overwhelmingly voted against a pay raise for BP’s Chief Executive Officer (CEO), Bob Dudley. Dudley effectively received a 20% pay raise in spite of a company wide ban on salary raises during the economic downturn in the energy sector. As Houston Chronicle business columnist Chris Tomlinson wrote, in a piece entitled “Times tough at BP, so chief executive gets raise, this raise was “in compensation for managing the company through a dramatic drop in share price, for laying off thousands of employees and endangering the company’s dividend.”

Tomlinson nailed it when he asked who does the Board represent, management or the shareholders? Now imagine a Board who is cozy with management and is made aware of a potential Foreign Corrupt Practice Act (FCPA) violation. If that Board has not shown the independence to even objectively evaluate the CEO’s performance in conjunction with compensation, what would give shareholders any comfort they would objectively investigate and evaluate such conduct? After all, any fine and penalty levied for a corporate FCPA violation will, at the end of the day, be borne by the shareholders to pay, not the culpable executives.

Moreover, how will such a Board attitude play out under the strictures of the Yates Memo and Department of Justice (DOJ) Pilot Program for enhanced credit for self-disclosure, investigating and remediation? One might hope that with criminal penalties hanging over their collective heads, Boards of Directors would follow their legal obligations and investigate thoroughly but if the Board is there to simply perform lip service to top management who knows?

This Board attitude also impacts employees in the trenches as well. While Tomlinson asks the basic question “Ask BP employees laid off in Houston if they got a big bonus and a doubling of retirement benefits”? I think the implication for a company’s FCPA compliance program may be equally troubling. I have often used the anecdote about the employee who is more worried about making his quarterly numbers than he is in following the Code of Conduct to make a sale.

Kelly looked at it from several angles in his article entitled “How BP’s Board Undermines Its Drive for Compliance”. I was particularly intrigued by his analysis through the prism of the COSO 2013 Framework. Kelly wrote, “Remember that one main message from regulators this year has been the board’s responsibility for corporate governance and ensuring that a “culture of compliance” exists at the business. The compliance officer plays a crucial role in supporting that culture, and in facilitating conversations among other parts of the enterprise so that culture thrives – but the board is the group with ultimate responsibility for putting the right elements in place.

If those elements sound familiar, that’s because they are all the same principles that go into the control environment of COSO’s framework for internal control. And that’s the key point here: a strong culture of compliance is a strong control environment. They are the same thing. Like any environment or any culture, they surround all the specific actions that transpire at your company every day. If they are rotten, all those actions become less effective.”

That is why I was absorbed when I read in Milne’s FT piece, “The world’s biggest sovereign wealth fund is launching a crackdown on executive pay, targeting high salaries at companies around the globe in an attempt to exert its influence in a debate that has been gathering pace in recent months.” As Yngve Slyngstad, chief executive of the fund, told the FT, “We have so far looked at this in a way that has focused on pay structures rather than pay levels. We think, due to the way the issue of executive remuneration has developed, that we will have to look at what an appropriate level of executive remuneration is as well.”

Excessive executive pay is certainly an issue that resonates across the globe. However now this issue has been tied to corporate governance. For if a Board of Directors, who are (in theory) in place to protect the interests of shareholders abdicates that duty to not only enrich but to protect executives, is there really any certainty that the Board will fulfill its other corporate governance duties?

One way to effect change is through enhanced regulation. Yet another effective manner is through the market. If there are large investors who believe that good corporate governance is a good business practice, this will lead the march towards more robust oversight of corporate conduct. Mike Volkov has said that he believes the increase in anti-corruption compliance programs has been one of the most significant developments in corporate governance. With the entry of the Norwegian wealth fund into a more forceful role in the corporate governance of the entities which it holds interests, how long might it be before they begin to consider compliance related issues?

With the release of Star Wars VII – The Force Awakens the Star Wars universe rejoiced. This move by the Norwegian sovereign wealth fund may equally portend a positive movement towards not only a cap on excessive executive pay but also a more rounded approach to seeing companies engage in good corporate governance.

 

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

Blackie SherrodBlackie Sherrod died last week. To any reader of sports pages across the nation and most particularly in Texas, Sherrod was about as good as it got. For me, he was right up there with Red Smith, Frank DeFord and Shirley Povich as one of the greatest sports writers of the second half of the 20th Century. His columns on the Dallas Cowboys in the 1960s and 1970s were truly pieces of art to be marveled at when savoring. He also had the good sense to hire Dan Jenkins and Bud Shrake as young sportswriters.

I thought about Sherrod when I read a recent article in the Harvard Business Review (HBR), entitled “Making Exit Interviews Count, authors Everett Spain and Boris Groysberg assert that exit interviews, when conducted with care, can be a very useful tool in two important areas: to increase employee engagement, to reveal what may not be working in the organization.

The authors believe that exit interviews can provide insight into what employees are thinking, reveal problems in the organization, and shed light on the competitive landscape. They believe that companies should focus on six goals in their exit interviews, that there must be an emphasis in both “tactics and techniques” and, finally, that the process is a continuing conversation.

I.      Overall Goals

  1. Uncover issues relating to HR. The authors find organizations “that conduct exit interviews almost always pursue this goal but often focus too narrowly on salary and benefits.” The problem with this approach is that salary concerns are not usually what drives employees to seek employment elsewhere. It is almost always something else. The article stated, “One leader from a food and beverage company told us that exit interviews inform his company’s succession planning and talent management process.”
  1. Understand employees’ perceptions of the work itself. Here the authors require that the person conducting the exit interview understand the departing employee’s job design, working conditions, culture, and peers. By understanding and questioning the employee on this information, the exit interview “can help managers improve employee motivation, efficiency, coordination, and effectiveness.”
  1. Gain insight into managers’ leadership styles and effectiveness. Leadership style is an important reason many employees depart for greener pastures. By inquiring into and understanding this dynamic, an organization can begin to “reinforce positive managers and identify toxic ones. One executive at a major restaurant chain told us that several exit interviews she’d recently conducted revealed that micromanagement was a big problem. The conversations, she said, “led to some very tangible outcomes,”” such as establishing training and development initiatives to create better managers.”
  1. Learn about HR benchmarks (salary, benefits) at competing organizations. While salaries and compensation packages are usually not the driver of departures, they certainly do play a role. You should use the exit interview to do some benchmarking. The authors cited to a HR executive at a global food and beverage who noted, “We use exit interviews to see how competitive we are against other employers: time off, ability to advance, different benefits, and pay packages. And we want to see who is poaching our people.”
  1. Foster innovation by soliciting ideas for improving the organization. The authors believe that exit interviews should go beyond the departing employee’s “immediate experience to cover broader areas, such as company strategy, marketing, operations, systems, competition, and the structure of his or her division.” They cite as one “emerging best practice is to ask every departing employee something along the lines of “Please complete the sentence ‘I don’t know why the company doesn’t just ____.’” This approach may reveal trends which can be incorporated into future innovations.”
  1. Create lifelong advocates for the organization. I found this one perhaps the most innovative, yet in many ways the most basic, which is of course to treat departing employees with dignity, respect and gratitude. Such treatment at departure may well encourage departing employees to recommend their former companies to potential employees, to use and recommend the companies’ products and services, and to create business alliances between their former and new employers. The authors cite to one North American financial services executive for the following, “You want [a departing employee] to leave as an ambassador and customer.”

II.     Tactics and Techniques

The authors believe that leaving such exit interviews simply to the Human Resources (HR) function is too simplistic an approach because “this approach marginalizes the process and suggests that it is an operational duty rather than a strategic opportunity. Human resources may administer the program day to day, but it is imperative that the right line leaders participate in the interviews and that the executive committee oversees the program’s design, execution, and results.”

The authors believe that exit interviews conducted by “Second-line managers (direct supervisors’ managers) typically receive more-honest feedback precisely because they’re one step removed from the employee. Also, these managers are in a position to follow up immediately and effectively. Their participation signals that the company cares about the opinions of departing employees.” Beyond this level, the authors believe that someone other than in the direct line should conduct the additional interview. I would suggest that this would be an appropriate location for the compliance department to become directly involved.

The specifications of who should be interviewed should also be considered. As departing employees can certainly be ambassadors for the organization, high level or senior management should be listed. However, from the compliance perspective, any employee who comes from a high-risk area, sector, market or geography should also be considered.

The authors point to the timing of the interviews as a key to productivity. They have seen interviews during the mid point between the announcement to depart and the actual departure date as a good time. (Of course, this assumes a policy more enlightened than asking an employee to leave immediately in such circumstances.) Yet some companies have waited until after the employee has departed because, as one person interviewed for the article noted, “They normally tell us very honestly why, and often we respond with programs to work on the problems.”

While a face-to-face interview is always deemed the most appropriate, if an employee has departed, this may not be feasible. The authors noted that some companies conduct telephone interviews or even online surveys. Nonetheless whichever method is used should have structure around the questions and questioning because “the strength of standardized interview questions is that the make it easier to spot trends.”

The penultimate issue is how will your company use this information? The authors write that the distribution of the information obtained “should respect the sensitivity of the data and protect interviewees’ candor, particularly about their bosses.” Moreover the “the distribution of data should be timed according to the executive decision cycle.”

Ultimately, always remember this is a continuing conversation that the authors call “retention conversations”. Think about using the exit interview questions and techniques with existing employees to build upon the internal data you might analyze during transaction analysis. These retention conversations, together with exit interviews can be not only a useful tool but also a critical one as well for the compliance function.

 

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

 

 

People-ProcessIt is rare you are able to write about someone who directly changed the quality of your life. Rarer yet that you did not know about him, only what he created, until you read his obituary. That happened to me recently when I read about the death of Dr. Peter J. Jannetta in the New York Times (NYT). Dr. Jannetta discovered a rare medical condition that affects hundreds of thousands Americans. That disease is trigeminal neuralgia, which affects cranial and facial nerves. It can cause such intense pain that its nickname was the suicide disease because that was the only way for many of those afflicted to make the pain stop. Yes it is that bad.

What Dr. Jannetta discovered was that in those afflicted, the fifth cranial nerve becomes entangled with hyper small veins, arteries and capillaries would impinge on the nerve, setting off intense pain. Yet Dr. Jannetta did not stop there, as he hypothesized that if such impingement was the cause of the pain, by removing the impingement, it might end the pain. It turns out he was correct and he developed the surgery called arterial decompression.

Dr. Jannetta made these discoveries and surgical developments in the 1960s. No one in the medical profession bothered to tell me about the procedure until 2012 and I had been diagnosed with the condition in 1976. If the medical profession had been a bit more open to this diagnosis and surgical technique, perhaps I might not have suffered for so long. If you know of anyone with there condition, tell them there is hope.

I thought about Dr. Jannetta, his decades long fight for people like me against the lack of acceptance by the medical profession when I read an article in the MIT Sloan Management Review, entitled “Learning the Art of Business Improvisation, by Edivandro Carlos Conforto, Eric Rebentisch, and Daniel Amaral. In this article the authors explore the issue of improvisation and write that while it “may seem to be spontaneous, but managers can foster it in innovation projects through the deliberate development of certain processes and capabilities.” For what improvisation really comes down to is the ability to “create and implement a new or unplanned solution in the face of an unexpected problem or change.”

Compliance is certainly one area that requires such flexibility because of the ever-changing business conditions that exist in today’s multinational organizations subject to the Foreign Corrupt Practices Act (FCPA). Moreover, as we saw last week with the announcement by Novartis that its South Korean subsidiary is under criminal investigation for allegations of paying bribes to physicians, this less than 60 days after agreeing to a FCPA enforcement action which involved payment of a $25 million dollar fine for the companies actions by Chinese subsidiaries.

Whether deliberately or not, compliance departments must improvise. Such compliance “Improvisation can foster problem solving, creativity, and innovation, and it is becoming a requirement for many organizations. Although improvisation might seem to be spontaneous and intuitive, to do it well requires the development of disciplined and deliberate processes and capabilities. Managers working in dynamic, fast-paced, and highly innovative project environments should develop and refine capabilities in these three areas to create a project environment that will enhance a team’s improvisation competencies – ultimately with an eye toward improving project results and innovation.” I have adapted their piece for the compliance practitioner.

The authors believe there are three general areas which a company can improve upon to help advance its abilities to adapt and change. They are (1) Build a culture that recognizes and views changes positively. (2) Create the right team structure and project environment. (3) Provide management practices and tools that facilitate improvisation.

Build a culture that recognizes and views changes positively

Here the authors believe that change can come from teams that have a “positive attitude toward dealing with and accepting ambiguity and project changes.” Not surprisingly, this does not come from top down leadership but allowing “higher level of autonomy in making decisions.” Further, the farther out from the corporate office, the more “teams should be empowered to make decisions locally, be informed about and willing” to take make changes and provide enhanced compliance risk management, and not overly fear potential failure.

Clearly the ability to make changes requires a robust compliance regime to begin with. However, having such a system in place, particularly through internal controls, allows a compliance department to “help them to reduce uncertainty more quickly and effectively learn from their experiences. Teams equipped with a broad array of tools and techniques can use them to respond to different types of challenges. The focus should be on helping teams anticipate and recognize changing circumstances and make more rapid and accurate decisions.”

Create the right team structure and project environment

Not surprisingly a key to making improvisation work is that you have good communication between the compliance function and business unit. This is not a new concept and communications runs two ways. If the business unit sees the Chief Compliance Officer (CCO) as Dr. No from the Land of No, they will not likely be calling for assistance. Yet compliance does not always know what business opportunities arise without that information so they cannot craft appropriate risk management solutions. The authors suggest that weekly interactions between leaders and key stakeholders are good first step.

Perhaps counter-intuitively, the authors also note that smaller teams appear to have more and better success. The authors observed “greater levels of improvisation in smaller teams that displayed more self-directing and self-organizing characteristics, such as being responsible for monitoring and updating the status of their activities and deliverables.” This can allow the compliance department to play a key oversight and support role “on the aggregated information and on more strategic issues related to the project.”

Provide management practices and tools that facilitate improvisation

Finally the authors found that “teams with greater improvisation characteristics were more likely to use agile management approaches, techniques, and tools. In fact, teams that embraced an agile approach were nine times more likely to have high levels of improvisation compared with teams that used a more traditional (waterfall) approach.” This means that not only will a command and control structure not be able to move as quickly and efficiently but also you need to operate at a level of sophistication beyond simply spreadsheets.

The authors also found, “The agile methods we observed in the teams with higher levels of improvisation included iterative development, supported by recurring delivery of higher-value deliverables; constant interactions between stakeholders and the project team; the use of visual tools to collaboratively manage the project with team members; and active involvement with the client and/or user in the development process.”

The ability to be agile is an important component of any best practices compliance program. The need to respond to business changes is always paramount. Yet there is no end to the variety of corrupt schemes engaged in by company employees. The Novartis matter in South Korea allegedly involved bribery through excessive payments for articles published in medical journals. Just as the bribery and corruption scandals involving GlaxoSmithKline PLC (GSK) and others in China demonstrate new and creative ways to put pots of money together to pay bribes, the Novartis issues may show another area that bears compliance scrutiny. A compliance function must be ready to adapt. When you do improvise, be sure to document it.

 

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

Lear's FoolI conclude my week honoring the 400th anniversary of the death of Shakespeare by using my favorite character in all his work to introduce today’s post. He is The Fool from King Lear. Of Shakespeare’s many theatrical innovations, his transformation of The Fool from the Renaissance Court Jester of songs, music, storytelling, medieval satire and physical comedy to commentator is right up there for me. The Fool became closer to the Greek Chorus. Shakespeare brought the Chorus commentary function back. As noted in Wikipedia, “Where the jester often regaled his audience with various skills aimed to amuse, Shakespeare’s fool, consistent with Shakespeare’s revolutionary ideas about theater, became a complex character who could highlight more important issues. Like Shakespeare’s other characters, the fool began to speak outside of the narrow confines of exemplary morality. Shakespeare’s fools address themes of love, psychic turmoil, personal identity, and many other innumerable themes that arise in Shakespeare”.

While Lear’s Fool was actually a font of wisdom and commentary, the same cannot always be said for the corporate fools who put evidence of bribery and corruption in emails, excel spreadsheets and PowerPoint slide deck presentations. In Foreign Corrupt Practices Act (FCPA) training I always remind attendees that if you put your bribery scheme in emails, it will be uncovered. Further, if you put together an excel spreadsheet tying your nefarious acts, such as hiring the family member of a foreign official or state owned enterprise employee to the award of a contract, it will be uncovered. Now I find I must supplement my training to add the following admonition: do not put your fraudulent scheme in a PowerPoint slide deck for presentation to senior management.

The issue previously arose with our friends at GlaxoSmithKline PLC (GSK) who put together such a presentation in 2013 for targeted bribery campaign code named “Vasily” borrowing its name from Vasily Zaytsev, a noted Russian sniper during World War II. According to Wall Street Journal (WSJ) reporter Laurie Burkitt the campaign “targeted 48 doctors and planned to reward them with either a percentage of the cash value of the prescription or educational credits, based on the number of prescriptions the doctors made.” While Burkitt did note “A Glaxo spokesman has said the company probed the ‘Vasily’ program and [the] investigation has found that while the proposal didn’t contain anything untoward, the program was never implemented.” But, from my experience, if you have a bribery scheme that has its own code name enshrined in a PowerPoint slide deck presentation, even if you never implemented that scheme, it probably means that the propensity for such is pervasive throughout the system.

Yet now we have more and greater evidence of corporate tomfoolery from the Volkswagen (VW) emissions-testing scandal. In an article in the New York Times (NYT), entitled “VW Presentation in ’06 Showed How to Foil Emissions Tests”, Jack Ewing reported that a top technology executive at VW prepared a PowerPoint presentation for management in 2006, laying out in detail how the automaker could cheat on emissions tests in the United States. Ewing wrote, “It provides the most direct link yet to the genesis of the deception at Volkswagen, which admitted late last year that 11 million vehicles worldwide were equipped with software to cheat on tests that measured pollution in emissions.”

The article noted, “It is not known how widely the presentation was distributed at Volkswagen. But its existence, and the proposal it made to install the software, highlight a series of flawed decisions at the embattled carmaker surrounding the emissions problem.” Moreover, “As the PowerPoint underscored, people inside Volkswagen were aware that its diesel engines were polluting significantly more than allowed. Yet company executives repeatedly rejected proposals to improve the emissions equipment, according to two Volkswagen employees present at meetings where the proposals were discussed.”

As more and more of the internal investigation dribbles out, VW’s claim that its emission-testing defeat device was the creation of a small group of ‘rogue engineers’ is rightly dying a death of 1000 cuts. The company began to understand that “The pattern of those [regulatory] tests, the presentation said, was entirely predictable. And a piece of code embedded in the software that controlled the engine could recognize that pattern, activating equipment to reduce emissions just for testing purposes.” This language demonstrates not only the reason behind the defeat device but the requisite mens rea to prove intent to deceive.

But VW did not stop at this aha moment of realization. The company made the defeat device better over the years. The article reported that the defeat device had been enhanced over the years. The software that allowed VW cars to appreciate when the car was being tested, differentiated from when the car was in use on the road. It measured such criteria as determining whether the steering wheel was in use and “During regulators’ tests, the engine software would turn up the pollution controls. When it was on the road, equipment designed to neutralize harmful nitrogen oxides would turned down, resulting in emissions that were up to 40 times the legal limit.” In tech terms, the software was upgraded from defeat device 1.0 to 2.0 and beyond to “detect other telltale signs of a regulatory test.”

The rogue employee defense was never going to work. To have software in place for over 10 years designed to defraud a regulatory scheme, requires a wide swath of knowledge in any organization. But not only within the organization, those vendors in the supply chain, which supplied component parts or products had to be in on the entire scheme as well. Moreover, the very top of the company has been shown to have been aware of these issues. Ewing said, “The management board led by Martin Winterkorn, the chief executive who resigned in September after the admission of cheating, repeatedly rebuffed lower-ranking employees who submitted technical proposals for upgrading the emissions controls, according to the two people who attended meetings where the proposals were discussed. The management board rejected the proposals because of cost”.

You might think only idiots would put into emails, spreadsheets and PowerPoint presentations not only intent to violate laws but also their plans. As bad as all of this is, it points to an even greater insight relevant to FCPA enforcement, that being the Myth of the Rogue Employee. Davide Torsello and Alison Taylor, in a post in the FCPA Blog, detailed some of the major reasons why the myth is just that, a myth. The VW PowerPoint adds yet another spike in its coffin. If your corporate culture is such that you not only communicate internally about illegal conduct but also record those communications, it speaks to a culture that supports and embraces skirting the rules. Commentators who claim that companies should not be punished by the actions of a small group of employees miss this greater truth; these employees would not engage in illegal conduct if their company, either through compensation, succession or other remuneration, did not reward them for engaging in such conduct.

That is the greater truth that Lear’s Fool would impart to corporate management.

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