Innovation 5I have been exploring innovation in the compliance function this week. For my final piece I want to consider the innovation process itself. In an article in the MIT Sloan Management Review, entitled “Finding a Lower-Risk Path to High-Impact Innovations”, authors Joseph V. Sinfield and Freddy Solis came up with a different method to view the innovation process. They posited something called the ‘Lily Pad’ approach, which they believe can be a lower risk stratagem to innovation. I found that this approach had some interesting applications for the compliance discipline.

The authors begin with the premise, which is found in the traditional risk-reward theory, when they noted, “Innovation initiatives and the funding programs that support them are generally viewed as “investments,” with an expectation that taking higher risks should be rewarded with higher returns. At the low-risk, low-return end of the spectrum, we tend to see investments that drive incremental innovation or development of innovations that are already proven. At the opposite extreme are corporate “skunk works” that seek to drive innovation in technology and business models to develop whole new product or service categories.” Compliance initiatives can fall anywhere along this spectrum for the reason that if they fail, it can create the conditions for a more systemic failure, which could bring the catastrophic consequences of a Foreign Corrupt Practices Act (FCPA) or other legal violation.

The authors believe that an incremental approach, which they designate as the ‘Lily Pad’ approach, “are developed and introduced opportunistically in application spaces that are ready for adoption. Progress in one lily pad garners resources/cash flow earlier in the development process and can create a pathway for subsequent lily pads in other application spaces.” This allows innovations to break out from their initial breakthrough at an organization, through the period where “decisions about which capabilities to develop and which application contexts to pursue” are made by the development team. All this leads to a progressive cascade of innovation moving forward, as visualized by the authors, as leaping from one lily pad to the next.

The authors list some characteristics of innovations, which they believe leaders should consider for investment. I have adapted them for the compliance function. Does the innovation “offer multiple pathways from first principles to impact” and how relevant is the innovation to multiple business lines or units? Will the innovation change the perspective of employees and even move towards reconfiguring the compliance ecosystem? Finally, is there potential for both growth and improvement in the innovation going forward?

After you have gone through and answered these questions, you should be ready to move forward with what the authors called ‘enabling actions’ and implement one or more of the innovations. By using their approach, the authors write that “Lily pad applications for an enabling innovation provide opportunities to match capability, purpose, and context in a manner that advances select performance dimensions of the innovation, aligns elements of ecosystems, and/or begins to shift” employee views across your organization. But more than simply the singular innovation, the lily pad approach allows your company to reduce the time and cost to jump to the next iteration of development.

Finally, the authors believe that you must “understand and proactively shape the ecosystem”, which for the Chief Compliance Officer (CCO) or compliance practitioner, means working with the business teams so that they understand how and why the innovation will help them achieve their corporate goals. Simply put employees can get stuck in the same rut of doing the same thing the same way. Yet it is a maxim that your compliance program must evolve to meet new risks and new demands. The authors’ lily pad approach allows for an incremental growth of change in ways that can demonstrate effectiveness and allow not only feedback but also acceptance from the employee base.

An example of such an approach could be around the use of data driven analysis from the compliance perspective of all dramatic growth in sales. Recall that there is no materiality level under the FCPA, so the business unit that experiences a dramatic growth in sales, even if non-material within the entire organization, could be the basis of a FCPA enforcement action. By focusing your innovation on one business unit that has experienced a dramatic growth, even if it is in a province of one country or a relatively small country in one larger geographic region, you can use this approach to demonstrate the usefulness of such data monitoring.

The lily pad approach would inform the presentation going forward as every business would want to know and understand how a dramatic growth occurred. Was it product driven? Was it personnel driven? Was a new sales campaign employed? Did a new or different product come to market? Of course, if the sales spike was due to nefarious activity such as bribery, corruption, financial fraud, accounting fraud or other egregious behavior then it can be reviewed and remediated as appropriate. For corporate management the initial results obtained by such a review could be the start of an entire innovation process around any portion of the sales cycle that might have been impacted by such stunning sales growth. It could certainly lead to better and more robust business forecasting going forward.

The authors end their article with four key questions, which I found to be an appropriate manner to end this series on innovation in compliance. First, do you understand the role of innovation in your compliance strategy? Second can you spot the innovations as this may well require you to think differently, particularly if you come from the legal department or have legal training, which certainly does not favor or foster innovation. Next, do you have the ability to adapt to innovations in your compliance function to the company as a whole? Put another way, can you demonstrate how an innovation in compliance will help the company do business more efficiently and in compliance with applicable laws. Of course it all begins with the willingness to engage in innovation and that starts with the top of your organization.

 

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

Harry PotterOne of the things I have enjoyed for years is listening to some of America’s top professors and academics that teach in their subject area of expertise through lectures from the Teaching Company. I just completed the 24 episode series entitled “Heroes and Legends: The Most Influential Characters of Literature” by Professor Thomas A. Shippey. I was interested in his episode on Harry Potter, whom he identified as a ‘whistleblower’. I have to admit I had never thought of Potter in this manner.

In his show notes, Professor Shippey articulates that Harry’s role is largely to prepare the magic world for the return of the Dark Lord, whose name , Lord Voldemort, is not to be mentioned. If Voldemort returns he will not only take over the world of magic but also lead its rule over the rest of us, the world of muggles.

Shippey believes this war is being fought on several fronts, which is a contemporary situation. Shippey writes, “Just like Harry, we face serious threats to our security: terrorism, financial instability, climate change, and more. We have to trust the state to protect us from those threats, but do we trust the institutions of the state? Skepticism about politicians, lobbyists, and bureaucrats is very much a part of the modern mindset. For this reason, ever since Watergate, we’ve had a word for another new kind of hero: the whistle-blower. As a whistle-blower, Harry tries to alert his community to one threat, but he also faces the other threat of the forces that are trying to hush him up.”

I thought about the struggles of Potter as a whistleblower when I read a piece by Michael Skapinker, in the Business and society column in the Financial Times (FT) entitled “The Libor trial and how to deal with a bullying dishonest boss”. One of the defendants, who was convicted this week in a trial in London, is Jonathan Mathew. According to Skapinker, “He told the court that he had no idea he was behaving dishonestly and only did what Peter Johnson, his manager, told him to do. Mr Mathew said he dealt mainly with Canadian dollar Libor matters and other currencies and only set US dollar rates when Mr Johnson was out of the office or on holiday.”

But more than following his boss’s dictate (I should note that Johnson has pled guilty to the Libor rate-fixing charges and is awaiting sentencing) Mathew was mercilessly bullied by Johnson. Skapinker wrote, “Early on, when another banker asked him to set a particular US dollar rate, he ignored the email, which earned him a rebuke from Mr Johnson when he returned. In future, Mr Johnson told him, he should take a “firm-first approach” and “help these guys out”. He also told the court that Mr Johnson used to hit him on the back of the head with a miniature baseball bat. This was to humiliate, not hurt him. Mr Johnson also made him stand on a chair on the trading floor when he could not name the capital of the Philippines.”

Not surprisingly the bullying was not only physical but verbal as well. In testimony it came out that Johnson had called Mathew, “a “deaf git” (Mr Mathew has hearing difficulties) and once sent him an email headed “brick dain” because the bank’s compliance department would have picked up an email headed “dick brain”.” If this was not evidence of a completely toxic workplace, I have not seen a much greater example.

However it is more than simply a failure of corporate culture, it is a failure of compliance. Roy Snell has been one of the most forceful in articulating the proposition that a Chief Compliance Officer (CCO) and compliance practitioner has to stand up for employees like Mathew and against corporate bullies like Johnson. One of the things every compliance function has to create is a safe place for such bullying conduct to be reported. Skapinker noted that he has “interviewed several whistleblowers over the years. Most have been driven half-crazy by the persecution, law suits and vituperation that followed their act of public service.” He further noted that while “You could call the ethics hotline. This is clearly the right thing to do, but it will almost certainly spell the end of your career and you and your family’s happiness.”

Every compliance department must make it clear that any such employee who comes forward with such tales will not face retaliation. Moreover, such a whistleblower should be actively rewarded for bringing such antithetical conduct to the attention of someone at the company who can do something about it. For if such a culture is allowed to not only exist but to flourish there will always be legal repercussions, in the form of some legal violations.

Harry Potter was willing to be a whistleblower and suffer the consequences. Not all of us have the wherewithal to do so. That is where compliance has to make a stand for what is right. Business is not the Marine Corp, where actions can literally be life and death. These are white-collar businesses and there is no place for the type of bullying that Johnson engaged in with Mathew Skapinker ended his piece with “There have been many villains in the financial crises of the past few years. Mr Mathew does not strike me as the worst.” I would add that every compliance practitioner needs to commit to preventing such conduct at his or her company. There should be some type of detection system in place to pick up such conduct if it does occur. Finally, there should be a remedy immediately brought to bear if such conduct does appear.

 

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