One of the most constant things about the compliance profession is its dynamism. Compliance programs are not static and the compliance profession is not static. Today’s cutting edge in compliance will be tomorrow’s best practice which will be next month’s standard expectation. While this drives those who focus on the law around compliance batty, properly understanding compliance as a business process makes this continuum clear. However, this means that any Chief Compliance Officer (CCO) or compliance practitioner must not only understand this uncertainty but embrace it to make their compliance programs respond to an ever changing legal and business environment. CCO leadership must be as dynamic as the corporate compliance programs they oversee.

Yesterday I wrote about the shift in corporate focus that brought Starbucks a huge reputational black eye, when a store manager had two African-Americans waiting in store for a colleague arrested for trespassing. Obviously the current economic and political realities for any American business can literally turn on a dime (or even a tweet). I was therefore interested in a recent article in the MIT Sloan Management Review, entitled “The Five Steps All Leaders Must Take in the Age of Uncertainty”, by Martin Reeves, Simon Levin, Johann D. Harnoss, and Daichi Ueda. The authors thesis is that “business leaders need a new mental model to better understand the complex interplay between companies, economies and societies.” I can only add this requirement is even more true for the CCO and compliance practitioner to move towards this theory.

The issue is that companies are all parts of much broader “business ecosystems — that are embedded in local and national economies, which in turn are interwoven with societies.” Changes made at one level, for example, the sourcing practices of US retailers, can directly influence higher-level systems, so “the economic value and social status of manufacturing skills” in a way totally unforeseen. The authors believe their system will assist business leaders to understand, adjust to and shape these feedback dynamics. Put another way, it is more fully operationalizing compliance which makes companies run more efficiently and provides a competitive business advantage.

Leaders in compliance need to master the art of fully operationalizing compliance systems, rather than just operating them, which means not merely extending their current game to learn and understand a new set of priorities and capabilities. The authors set out five steps to effectively shape the extended system in which they participate, which I have adapted for the compliance practitioner.

  1. Observe and understand the broader system.Compliance professionals must situate an operationalized compliance program in the context of a wider system that includes consumers, ecosystem partners, media institutions, and policymakers. This means understanding the key players and their interests and mapping out the important relationships and risks between them. Often, opportunities for and risks to the business become visible only by considering the broader system beyond traditional industry boundaries in a more comprehensive risk management program.
  1. Master the art of intervening in the system.Compliance leaders need to learn how to intervene effectively in a complex adaptive system. A common managerial mistake is to limit oneself to direct leverage points. Instead, seemingly softer indirect points can often provide more leverage in complex systems. By finding an indirect but more powerful leverage point a CCO can move compliance forward in a manner that more fully integrates the controls of compliance into the business. Using soft skills is one of the key ways a CCO or compliance practitioner exudes influence and this skill is a must.
  1. Orchestrate collaboration in the system.This point directly relates to the CCO or compliance professional as the orchestra conductor. Not only must the compliance leader work in a manner which requires striking a balance between the often-conflicting needs of companies and the broader system that they constitute but such a person “must foster mutualism and trust among the companies.” This goes beyond simply “modeling the right behaviors by creating value for the overall system but also actively surfacing and resolving tension within the system.” A compliance professional should help all stakeholders to “improve and sharpen their value proposition, whereas unsurfaced tension increases the risk of deeper disruptions down the road.” 
  1. Foresee and manage systemwide risks.The authors note that with “the increasing interconnectedness and interdependence of companies, many corporate risks present themselves to the entire system rather than to individual companies. To manage systemwide risks, leaders must be able to detect potential threats to the system’s health and have the courage to preemptively change practices to avert them.” This requires an active “antennae that sense changing political, social, and technological signals; articulate the risks these developments bring; and also act as disruptors to prod other stakeholders in the system to adopt new behaviors, even when the direct benefits to their own companies are not clear or immediate.” Here you can think of the Volkswagen (VW) emissions scandal and its negative impact on not only the German automobile industry but also the German national brand of quality and excellence.
  1. Lead with a new mindset.This is one of the biggest changes CCOs and compliance practitioners must embrace. Most of us are lawyers and these types of skills are sorely missing from law school curricula. Compliance professionals simply cannot rely only on formal authority or a chain of command when working on their system. As Jenny O’Brien and Roy Snell continually remind us, they are purveyors of persuasion. Moreover, they must leverage informal ways of exercising leadership that can transcend organizational boundaries and certainly beyond the hidebound legal dichotomy of us v. them. The authors note, “these actions transform leadership from a position of authority into an activity that can create broader influence. This transformation requires, at its root, a mindset shift from thinking in reductionist models” of performance toward more holistic models of system performance. Compliance professionals who not only embrace this new paradigm but also work towards managing this shift are bound to create an advantage for their company as well as their wider ecosystem.

What compliance leaders must do is have a broader business and social ecosystems vision. The authors call it “nested complex adaptive systems: multilevel, interconnected, dynamic systems hosting local interactions that can give rise to unpredictable global effects and vice versa. Acknowledging the unpredictability, nonlinearity, and circularity of cause-and-effect relationships within these systems is a notable departure from the simpler, linear models that underpin traditional mechanistic management thinking.” Finally, do not fear change but embrace it. Businesses change every day and while a CCO does not have to do so, if you stand still you will surely lose ground.

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, 2018

There is not much more iconic in the US than Starbucks. As such they present some very visible and public lessons learned for the compliance practitioner. Recently Starbucks generated extremely negative news for having Philadelphia police arrest two persons who were waiting for a third person for a meeting. I want to use this most recent black eye for Starbucks and an earlier incident to help explain the need for a nimble and agile risk management process in any best practices compliance program. This risk management process includes forecasting, risk assessments and risk-based monitoring.

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

All these things, to some degree, should appear in a risk assessment for the organization. Meaning, at the corporate level, what happens if your core product becomes something different than simply a consumer product, such as coffee? There should be a risk assessment node which has a component that notes these changes so that you can adapt as necessary. A robust risk management process should be designed to elevate these new issues. If something does change, the next step would be to take appropriate course of action to address any of those risks.

The most recent story involved the arrest of two African-American men who were waiting for a third person at a Philadelphia Starbucks. As Matt Kelly noted in his Radical Compliance blog entitled “Starbucks and Policy Management Perils”, the story was “two black men, Rashon Nelson and Donte Robinson, entered a Starbucks in downtown Philadelphia to meet an acquaintance for a business appointment. Nelson first asked the manager to use the bathroom; the manager declined and said the bathroom is reserved for paying customers only. The men then sat at a table without ordering anything, waiting for their acquaintance to arrive. The manager, who is white, came to their table and asked if they wanted to order anything. They said no. Two minutes later, the manager called the police to evict Nelson and Robinson from the store. The police arrived and arrested them for suspicion of trespassing.” After spending several hours in jail, the two men were released.

Matt detailed many of the issues from the compliance policy and procedures perspective. However, I see another lesson for the company. Starbucks was initially a coffee shop, selling coffee and the coffee experience. If you have ever been to the original Starbucks across from Pike Place Market in Seattle, it is the consummate coffee shop experience as it does not even provide seating. The most recently opened Starbucks in Houston is gorgeously laid out with comfortable chairs and full working tables for those writing blogs.

With its ubiquitousness and growth the company has largely become the meeting place of America. Starbucks’ design has made itself America’s public space with clean, welcoming and open stores. It is certainly one thing if you have a coffee shop with limited seating to request persons there purchase a cup of joe but that type of approach is inconsistent with being America’s greenspace, open and welcoming to all. If you have made yourself that deeply embedded into America’s consciousness as the gathering spot to wait for meetings or even type out and post a blog (as Matt did for his blog on the subject) your risk profile has rather dramatically changed.

This means your forecast and risk assessment must take into account there will be racism and racial profiling by Starbucks store managers. This event did not happen in the South where many similar attitudes still exist but in a major Northern metropolitan center. Starbucks should have not only forecast this risk but it should have been more closely assessed in both its hiring practices and ongoing training. As to the latter, Starbucks has announced a one-half day nationwide store closure for training on racial discrimination issues. While some may say this is too little, too late; at least it is a start.

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

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

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

Their forecast plans something, the risk assessment should have had countermeasures to address, and instead if they didn’t have this in place, they’re going to have to wait until they start to have a Twitter feed that blows up… The risk assessment model should say, “Then we will do the following. Texas was dissatisfied by this change and same in our pilot in Wisconsin. Let’s stop not giving out sleeves… Then eventually that starts to dissipate and they get rid of this whole new silly paradigm.””

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

The furor over the arrest of the two men at Starbucks may well last for some time. As noted at least Starbucks did not try and hide behind the rogue employee argument. It is stopping its business for a half-day to address the problems in its own organization. I hope every compliance practitioner can learn from Starbucks mistakes and responses.

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, 2018

I continue my look at US Presidents for their leadership during their presidencies. Today, I consider James K. Polk, who was America’s 11thPresident. While only serving one-term, his presidency was certainly momentous. It provided one international war (albeit hemispheric); one near war and two major changes in economic policy. It also provided several lessons for the Chief Compliance Officer (CCO) or business leader.

Polk, the Democratic Party candidate, was elected to the Presidency in 1844, in what many believed was an upset win over the far more well-known and better regarded Henry Clay, the Whig Party candidate. Polk has been claimed to be the first dark-horse candidate to be nominated for the Presidency and then to win it. However, Polk’s background demonstrated a firm grounding in the American experience.

Polk came from Scotch-Irish stock who immigrated to the then frontier on the eastern slope of the Appalachian Mountains in the 1600s. His grandfather led the greater Polk clan over the mountains and into Tennessee in 1803. Polk’s family became established and if not aristocracy, certainly gentry, by the 1820s when Polk was sent to the University of North Carolina at Chapel Hill for college. (Polk is the only UNC grad to become President). Moreover, Polk became a part of the American political class. He trained as a lawyer. Beginning in 1825, Polk served 14 years in Congress; four as speaker of the house. In 1839, he was elected Governor of Tennessee for one term. He was a candidate for Vice President (VP) in 1840. When the 1844 Democratic convention became deadlocked, Polk came out as the candidate on the 9thballot.

Announcing himself to be a one-term candidate in his election campaign, Polk set himself four goals for his administration, all of which he achieved. Walter Borneman, writing in a Harvard Business Review (HBR) article entitled “Presidential Leadership: Pursue a Vision but Mind the Details”, said of Polk’s “goals–“four great measures” he called them–that he enumerated for his administration: the resolution of the decades-old joint occupation of the Oregon country with Great Britain; the acquisition of California and an expanse of the Southwest; the reduction of the tariff that was crippling the southern economy; and the creation of an independent treasury system immune from recent national bank wars.”

Resolution with England over Oregon

If he had done nothing else, Polk’s settlement with Great Britain of the boundary dispute over the Oregon Territories would reign supreme. The US had long called for a boundary of 54 degrees, 50 minutes; while England lobbied for the 49thparallel. The former is in far north (now British Columbia) and the latter the current boundary. But the 49thparallel slices across Vancouver Island. Polk actually threatened war over this dispute. This serious threat coupled with the change in British economics in the mid-1840s with the repeal of the Corn Laws, induced Britain to be more desirous of a settlement.

Polk demanded that the British make a formal offer of the 49thparallel, which they did. Polk then ceded the whole of Vancouver Island to England with the US retaining shipping lanes in Puget Sound. A treaty was signed, and it was ratified by the Senate in a 41–14 vote. Polk’s willingness to risk war with Britain had frightened many, but his tough negotiation tactics may have gained the US concessions from the British (particularly regarding the Columbia River) that a more conciliatory president might not have won.

Acquisition of California and an expanse of the Southwest 

Here Polk tried a much softer tact which did not work and led to the US War with Mexico in 1848. This War started over the admission of the Republic of Texas into the Union but ended with the successful purchase of California and the now western states of New Mexico, Arizona, Nevada and parts of Utah and Colorado. It also settled the dispute with Mexico over Texas once and for all time (unless you include the Zimmerman Telegraph), setting the border at the Rio Grande River. While many, including Abraham Lincoln, portrayed Polk as a war monger, it is clear from the historical record, that Polk favored negotiations with Mexico.

However, Mexico refused to negotiate and attacked US soldiers on US soil and the country went to war. Even then, Polk attempted to negotiate with Mexico during the hostilities. It took the capture of Mexico’s capital and complete defeat of the Mexican Army to secure a treaty, ending the war and the US purchasing the aforementioned territory for a $15 million payment to Mexico, culminating in the Treaty of Guadalupe Hidalgo. This treaty and the ending of the dispute with England over the Oregon Territories doubled the size of the US.

The reduction of the tariff

There were two economic issues that Polk accomplished which greatly furthered US economic interests. The first was the reduction of the Tariff of 1842. Polk directed Secretary of the Treasury Robert Walker to draft a lower tariff, which Polk submitted to Congress. After intense lobbying by both sides, the bill passed the House and by a one-vote margin, cast by VP George Dallas to break a tie, the Senate in July 1846. The VP, although from protectionist Pennsylvania, voted for the bill, having decided his best political prospects lay in supporting the administration. It substantially reduced rates that had been set by the Tariff of 1842. The reduction of tariffs and the repeal of the Corn Laws in Great Britain; both coupled with the rapprochement in relations between the countries after the resolution of the Oregon Territories dispute led to a boom in Anglo-American trade. By reducing tariffs, US trade and economic fortunes increased.

Creation of an independent treasury system

Polk was dead set against another chartered National Bank. Yet even he recognized the need for the US to have a location to securely store species. To do so, Polk signed the Independent Treasury Act into law on August 6, 1846. It provided that the public revenues were to be retained in the Treasury building and in sub-treasuries in various cities, separate from private or state banks. The system would remain in place until the passage of the Federal Reserve Act in 1913. Given the rancor over Bank Charter feud during the Jackson years, this was a welcome relief for both creditors and debtors of the US.

Polk once famously said, “I intend to be myself President of the United States.” He did so and his leadership style was quite modern in many ways. He kept his eye on the strategic picture but also was able to execute tactical details. Borneman noted, “Polk rarely allowed himself to become overwhelmed, never feared delegating, and always demanded accountability in return. “I have made myself acquainted with the duties of the subordinate [Cabinet] officers,” Polk wrote late in his term, “and have probably given more attention to details than any of my predecessors.”” He concluded his piece on Polk with the following, “But by minding the details without taking his eye off his major goals, James K. Polk left a political legacy that transformed both the executive power of the presidency and the geography of the American nation.”

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, 2018

One of the key lessons we have found on leadership has been that of listening. Almost every great leader had this skill. Unfortunately, at times that skill becomes a downside in an organization when the leader only listens to what their subordinates think they want to hear. This can lead to a leadership failure which can have catastrophic results for the organization. This problem is one of the reasons we are currently seeing the financial trouble at General Electric (GE) play out on a national and international stage from the prior CEO’s ‘Success Theater’.

The problem was not that former CEO Jeff Immelt did not listen; the problem was that he did not want to hear any bad news. That led to what Thomas Gryta, Joann S. Lublin and David Benoit, writing in the Wall Street Journal (WSJ), dubbed the “Success Theater” at GE. In a piece entitled “How Jeffrey Immelt’s ‘Success Theater’  Masked the Rot at GE” they detailed the stories and tales that “Mr. Immelt and his top deputies projected an optimism about GE’s business and its future that didn’t always match the reality of its operations or its markets, according to more than a dozen current and former executives, investors and people close to the company.”

The problem this false culture pervaded down into the ranks (as one might expect) so that sales and revenue projections were not based on the facts in the business units but on the hopes and dreams of those business unit leads, all because that is both what their leaders wanted to project to the outside world and what he wanted to hear. The consequences were “unreachable financial targets, mistimed bets on markets and sometimes poor decisions on how to deploy cash.” As one Deutsche Bank analyst said, “The history of GE is to selectively only provide positive information.  There is a credibility gap between what they say and the reality of what is to come.” Another commentator, Sandra Davis, “founder of MDA Leadership Consulting: “GE itself has never been a culture where people can say, ‘I can’t.’””

But this was more than a company leader requiring his direct reports to have a ‘can-do’ attitude. Immelt “didn’t like hearing bad news, said several executives who worked with him, and didn’t like delivering bad news, either. He wanted people to make their sales and financial targets and thought he could make the numbers, too, they said.” The problem with this approach is that it can mask problems, which can become very serious overtime.

GE was lauded for its stock buy-back program in the early part of the decade. However, it is clear now that GE was doing so to mask the softness of its revenues. Adam Hartung, writing in Forbes.com piece, entitled “GE: A Total Leadership Failure”, noted that the stock price had dropped over 1/3 during Immelt’s tenure at GE and in 2015 began a massive stock buy-back program to prop up the price for investors. About the only good thing one can say about this program is that at least Immelt did not borrow money for this buy-back program as he financed it internally. But even this approach had consequences as the company is now strapped for cash.

Yet by 2018 the drop in the stock price had become almost catastrophic, down some 44%. Then came the bombshells in this calendar year. First, that GE would cuts its annual dividend payment for only the second time in its 125-year history. The next bombshell was the company announced it was taking a $6.2 billion charge in its fourth quarter related to its insurance operations and needed to set aside $15 billion over seven years to bolster insurance reserves at its GE Capital unit. The final bombshell(s) were the announcements that the company was restating its earnings for 2017 and 2016 and that the Securities and Exchange Commission (SEC) was now investigating them for these accounting issues.

Even worse, this ‘Success Theater’ was not only about information to and from Immelt. It went above him up to the Board as he apparently gave the Board overly optimistic projections. It came to a head for the Board last September due to the torpid perform of GE’s largest recent acquisition Alstom. Unnamed sources told the WSJ that Immelt “told the board that management had identified risks in the power business yet downplayed them. The probability and risk were way off”.  Then in “September that the board learned the depths of the problems at the division, which accounts for 30% of GE’s approximately $122 billion in annual revenue. GE Power was sitting on too much unsold inventory and was discounting deals to hit sales projections.”

The Board was so shocked and dismayed that “Several directors discussed in November whether the entire board should be fired, according to people familiar with the meeting. Instead, what had been an 18-person board will lose half its members but soon add three new directors in coming months.” And this Board action was before the dire financial announcements of 2018.

Perhaps not all of these failures can be laid at the of floor of bad acquisitions, bad bets or bad business sense of Immelt or his colleagues. But it is becoming clear from his tenure at GE that his failure to be willing to hear bad news contributed to a culture within the organization that the reality might not be acceptable if it was something other than what Immelt wanted to hear. That is one very large leadership failure.

For a richer take on the failure of the “Success Theater”, listen to the commentary by myself and Richard Lummis in this week’s episode of 12 O’Clock High, a podcast on business leadership, by clicking here.

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, 2018

The golden age of polar exploration lasted from about 1895 to 1912 during which time explorers reached both the North Pole and the South Pole. Yet even today their explorations and expeditions raise admiration and even awe. In this episode, we discuss the race to the South Pole and what leadership lessons may be drawn from it. The three principals we discuss in this episode are Englishmen Ernest Shackleton and Robert Falcon Scott and Norwegian Roald Amundson.

Of these three men, Shackleton turned back some 90 miles from the Pole, Scott made it to the South Pole some 35 days after Amundsen and died on the return leg, with all his men. Only Amundsen made it to the South Pole and returned to tell the tale. In this episode we explore:

  • Leaders need a clear strategic focus;
  • Leaders need to be open to innovation;
  • Leaders need to rely on their team members (you don’t have to do it all); and
  • Leaders should forge team bonds.

The Final Word

Perhaps the final word should come from Apsley Cherry-Garrard, a member of Scott’s second expedition, who made the following observation: “For a joint scientific and geographical piece of organization, give me Scott. . . for a dash to the Pole and nothing else, Amundsen: if I am in the devil of a hole and want to get out of it, give me Shackleton every time.”