2010 – Page 31 – Compliance Building

SEC Commissioner is a Blog Commenter

So you write a blog post about the fiduciary duty of financial service providers to their clients. Actually, the real story is about the lack of fiduciary duty that brokers have to their customers. Then an SEC Commissioner chimes in.

Tara Siegel Bernard writes for New York Times blog, Bucks: Making the Most of Your Money. On February 16 her post was Will You Be My Fiduciary? Her proposal was to arm consumers with fiduciary rights, regardless of what the law says. Merely ask our provider to sign a fiduciary pledge so they have a contractual obligation to be a fiduciary.

Perhaps to her surprise, she got a comment from Elisse Walter, Commissioner, Securities and Exchange Commission:

This well-written, easy-to-understand proposal captures the way that all financial professionals should treat investors. It recognizes that all financial professionals should be subject to a fiduciary duty. And in a simple and straightforward way it articulates the scope of the duty and cuts through what has become non-productive debate on this issue.

This articulation allows us to move on to another critical issue: financial professionals are unfortunately subject to different obligations when they are performing virtually identical services for investors. For example, a person cannot start a brokerage firm unless she demonstrates to a securities regulator that she has the expertise and operational capacity to engage in the type of business she proposes to start. No equivalent process exists for investment advisers. And, the law requires an adviser to disclose to his client the full range of circumstances where their interests may conflict, while the law governing brokerage firms does not impose that blanket obligation.

These are only two examples of the obligations that should be harmonized. I’m ready to see us get on with that work.

According to a message I got from Mark Story, the SEC’s Director of New Media, it’s only the second time that a senior-level SEC official has commented in a public forum.

The first was when former SEC Chairman Christopher Cox commented on a blog post by Jonathan Schwartz: Sunlight on a Cloudy Day….

It looks like an SEC Commissioner posts a blog comment every three and half years. Plan ahead for 2013.

Actually, I’m surprised that the SEC Commissioners have commented at all. I recognize that high-level government officials have to be much more cautious about what they say in a public forum. They run into a similar problem with the dissemination of information that public companies have with Regulation FD. Surprisingly (or not), that just so happens to be the subject of that first SEC comment.

Wrap Up of the Global Ethics Summit 2010

Dow Jones and Ethisphere put on a great conference addressing ethics and compliance professionals. The Global Ethics Summit 2010 had a stellar line up of panels and presenters.

As with most conference’s it lacked power and wifi access. Fortunately, my company’s sturdy laptop battery and AT&T wireless access card allowed me to live blog from the sessions. Below are the blog posts that contain my notes from each session.

For pictures, DowJones has published some photos on Flickr: Global Ethics Summit 2010 Photos. There is also a stream of updates on Twitter from the conference: #GlobalEthics.

Since the posts were live from the sessions they are probably riddled with typos and grammatical errors. At least it’s better than my handwriting.

Compliance 2010 – What’s Next?
New challenges abound amid advancing best practices, not to mention the continually escalating rate of enforcement both by U.S. regulators and overseas officials. What’s on the horizon for compliance? This roundtable discussion comprised…Read more »

Working Toward a Healthier Organization: Pfizer’s Compliance Program
There are a number of challenges associated with maintaining integrity as a top priority in a highly competitive global business. But sometimes, despite company’s most earnest efforts to effectively implement compliance metrics and…Read more »

Tone at the Top: The Board’s Role
Understanding and supporting a prudent ethical and compliant tone throughout an organization is a core responsibility of the board of directors. Board actions are more transparent than ever to employees, investors, regulators, media…Read more »

Global Insights into the Anti-Corruption Landscape
Dow Jones Risk & Compliance presents the results of a recent survey of current anti-corruption regulation, emerging trends and the impact on corporations around the world.The speaker was Rupert de Ruig, Managing Director,…Read more »

Doing More with Less: Compliance During Tough Economic Times
Let’s face it: compliance is usually seen as a cost center. While there’s been some good and interesting research about the positive impact on the business of a good ethical culture and brand,…Read more »

Training a Diverse Workforce: Best Practices
Having a code of ethics is not enough to ensure compliance. Training is the vital step that brings these standards to life—effective training helps ensure that key tenets are retained and applied. While…Read more »

Don’t Be Evil: Imagination at Work with Google and GE’s Compliance Programs
General Electric and Google are two very different, yet equally substantial powerhouses with varying businesses to each company’s name. Ensuring compliance with U.S. and foreign regulations while maintaining Google and GE’s respective competitive edges…Read more »

Transparency – What, How Much and When?
How much should a company be disclosing to shareholders, investing communities, regulatory authorities and customers about its compliance program and other ethics-related activities? What risks does a company shoulder when it takes a…Read more »

When the Government Comes Knocking
What’s the best course of action when addressing a regulatory inquiry? Many have suggested that having a better than average compliance program to showcase will certainly help your case. But what are some…Read more »

Does Compliance Matter?
When trouble arises, one of the factors prosecutors consider during an investigation is the existence of a strong compliance program. Recently proposed amendments to the Federal Sentencing Guidelines would formally lower the sentencing…Read more »

Does Compliance Matter?

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

When trouble arises, one of the factors prosecutors consider during an investigation is the existence of a strong compliance program. Recently proposed amendments to the Federal Sentencing Guidelines would formally lower the sentencing range for companies with certain compliance mechanisms in place. But is there enough incentive for companies expending resources, particularly in tough economic times, or will they just get in trouble anyways? And at a time when a company’s brand value is increasingly dependent on intangible assets such as reputation, what are the financial repercussions on compliance? Do companies with ethical reputations really outperform those not known for their good behavior?

Panel:

Joan Meyer, Partner, Baker & McKenzie LLP
Jeffrey Benjamin, Vice President & General Counsel, Novartis
Patricia Nazemetz, Chief Ethics Officer, Xerox
Charles Elson, Director, HealthSouth
Gregory S. Nixon, Senior Vice President, General Counsel, Corporate Secretary & Chief Compliance Officer, DynCorp International

Jeff noted the importance of a “Speak Up” culture at a company. You need employees to report problems up the chain. Leaders at all level can chill a “Speak Up” culture.

Since Greg’s company is a government contractor, they need to make the government happy or they lose their biggest customer.

Jeff thinks one of the key elements of an effective compliance program. Live training is by far the most effective. (He gives an “F” to the summit because there was not much interaction.) He makes sure that the trainees get lots of documentation and information before the training session. He makes sure that annual training is different each year.

Patricia sees alignment as a key you need to make sure the compliance program is aligned and in the context of the underlying business. Access is key so that people have an open door to ask questions. Analysis is key to make sure that you spot issues. Adjudication needs to be in place so that bad acts are punished. You need to think about how much disclosure you make internally and externally.

Charles emphasized the need for repetition is needed. You need to keep sending out the message. He also though compliance and legal departments should be looked at as profit centers, not cost centers.

Greg emphasized the need to have a way for people to come forward and for the company to know what to do when someone comes forward.

Charles compared the hotline to the moon mission. People complained that going to the moon was a waste of time and money. But there were tremendous collateral benefits from the moon mission. (Love that Tang and Velcro.) The same is true for the hotline. It can provide tremendous insight to the corporate operations even if nothing material as a compliance issues comes from the hotline.

When the Government Comes Knocking

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

What’s the best course of action when addressing a regulatory inquiry? Many have suggested that having a better than average compliance program to showcase will certainly help your case. But what are some strategies for engaging with your lawyers in these unique cases? And how distant or directly should a company be involved in the discussions with DOJ or other regulators?

Panel:

Ty Cobb, Partner, Hogan & Hartson
Thomas O’Neil, Advisor, Wellcare Health Plans
Eric Feldman, Senior Advisor to the Director for Procurement Integrity, National Reconnaissance Office
Hank Bond Walther, Assistant Chief, U.S. Department of Justice
Brady Long, Vice President, General Counsel & Secretary, Pride International

Hank started off by sharing his thoughts. It is always good to have a compliance program. When the DOJ comes in, they don’t look at the paper program for compliance, they want to see how it works in execution. The DOJ looks behind the facade. They want to know about training, they want to know what the risks are and how they addressed those risks. Off-the-shelf compliance will not make the DOJ happy.

Eric pointed out the the new Federal Acquisition Regulations require the agency to include ethics and compliance programs as part of their evaluation of potential contractors. Everyone focused on the mandatory disclosure requirements. The government is focused on the due diligence prior to entering into the contract. They want to prevent problems from occurring.

Thomas pointed out that abroad, they think about fear peddling. Largely because the US approach to compliance has not made its way abroad. You need to have integrity, you need effective self-policing and you need to engage in responsible self-reporting. You need to integrate that into the “marrow” of your enterprise.

The problems at Pride came from acquisitions years earlier. Those organizations were not properly integrated into the overall organization.

Hank agreed that enforcement abroad is not as strong as the US. However, the US is no longer the “only sheriff in town.” Enforcement for corporate misdeeds is on the rise and sharply on the rise in some areas and some jurisdictions.

Hank also pointed out that he sees significant differences between the outcomes for companies that self-disclosed as opposed to those who got caught. (It sounds like there is room for some empirical studies on the treatment. Maybe there are some and I have not seen them yet.) Eric agreed that the end result would be dramatically better if they self-disclosed as a government contractor.

Thomas put a challenge back to Ty about how are big laws positioning themselves to really help companies, in-house counsel and compliance officers be better. The days of talking about waiving privilege and whether to report are over. Law firms need to prove their that their advice is an effective part of the compliance program.

Hank chimed in and agreed with Thomas’s take on the use of outside law firms. The DOJ sends FBI agents to interview executives, to seize records and run stings. They are less likely to do so when you self-disclose.

Transparency – What, How Much and When?

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

How much should a company be disclosing to shareholders, investing communities, regulatory authorities and customers about its compliance program and other ethics-related activities? What risks does a company shoulder when it takes a more transparent approach than not, and what are the risks associated with non-disclosure? And, when a possible transgression has been uncovered, when and how is disclosure appropriate, what are the benefits to the company of disclosure in this case, and how should third parties (such as outside counsel) be engaged when doing so?

Panel:

Alex Brigham, Executive Director, Ethisphere Institute, Ethisphere
Nancy Zucker Boswell, President & CEO, Transparency International USA
David Andrews, Board Member, Union Bank of California
Wendy Hallgren, VP, Corporate Compliance, Fluor
David Howard, Partner, Dechert

Wendy tells how Fluor uses transparency as a competitive advantage. Public disclosure makes for public identity. You want your employees and customers know that getting down on time is one factor. Getting it done right is the most important goal.

Nancy pointed out that the correlation between to trust and transparency. If people are watching, then you are going to act better. As companies focus on corruption, sustainability and ethical issues in their reporting there will be pressure for others to also report. Transparency helps with commitment and measurement of steps towards compliance.

The panel took on this issue of whether additional disclosure creates more liabilities. There have been some rumblings that there could more liability to the company.

David Andrews pointed out the board has a standard of care that they need to meet. There is a responsibility to get information out to the shareholders. Frankly, if you are doing something good, you should let people know that you are doing something good.

David Howard, wearing the lawyer, pointed out that no compliance program is perfect and issues will fall through the cracks. If you publicize that you have a complete program, you need to be careful that you are not making false statements.

Inevitability what you do today in 2010 will be judged by the standards in place in 2015. You need to stay ahead of the game.

When reporting to the board you need to be careful that you do not overwhelm them with information. You need to highlight issues if you really want their input.

There are two disclosure tests. (1) Do you need to disclose to the shareholders? and (2) Do you need to disclose to the government? The next step after whether you “have to disclose” is “should you disclose?” Theoretically, you will get better treatment if you voluntarily disclose. However, there is no empirical evidence that you actually get treated better. You show your stakeholders that you are committed to doing the right thing. It does not prevent the cost of an expensive and lengthy investigation. You may still be subject to government action even if the sentence is reduced. You also open yourself to civil litigation. You need to make a “gut check.”

Don’t Be Evil: Imagination at Work with Google and GE’s Compliance Programs

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes from this session:

General Electric and Google are two very different, yet equally substantial powerhouses with varying businesses to each company’s name. Ensuring compliance with U.S. and foreign regulations while maintaining Google and GE’s respective competitive edges in today’s increasingly complex and competitive marketplace can be daunting, to say the least. Brackett Denniston, Senior Vice President and General Counsel for GE, and Andy Hinton, Chief Compliance Officer and Associate General Counsel for Google, compare notes about how each company tackles critical issues, what has worked and what hasn’t and what issues most concern them going forward.

This session was held during lunch so my notes are sparse.

My first observation is that Brackett showed up in a dark suit, white shirt and a blue tie, looking very GE-ish. Andy was dressed in jeans and sport jacket, looking very Google-ish. (Although Andy came from GE and is a self-proclaimed GE disciple.)

Andy uses lots of measurements in his compliance program. He is trying to model the Google program on his experience at GE. GE has a reputation for lots of measurement

It is important to let people know that their jobs are at risk for compliance failure. You don’t want to just find scapegoats. You need to find the real bad actor.

You also need to reward employees for good behavior. It is important to point out the good stuff and the bad stuff.

Response is they key part of the process. Get the facts fast and disclose fast after you have those facts.

Google relies even more on their brand than GE. It’s hard to replace a nuke reactor. It’s easy to switch search engines.

Without your reputation, it’s hard to business. Your company’s reputation is a big part of a company’s value.

Build a case for value. You are better off missing the numbers than creating a reputational risk. Balance the risk and cost of the violation against the small dollar value of the gain from the bad act.

As long as you have board and CEO buy in then you can do a lot with limited resources.

You want to hire and promote people you can trust and that live and breathe the company culture.

The compliance group at Google is not trying to be cutting edge, unlike the rest of the company. The want to be block and tackle.

In regulated enterprises you need to have heightened awareness and a different approach to compliance. And there is more regulatory risk coming. Even China is promulgating thousands of regulations.

You have to be better than merely meeting the base regulations.

Training a Diverse Workforce: Best Practices

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

Having a code of ethics is not enough to ensure compliance. Training is the vital step that brings these standards to life—effective training helps ensure that key tenets are retained and applied. While organizations need to take every measure to ensure that employees take training principles and apply them to everyday situations, this oftentimes is easier said than done. What are the best practices in workforce training employed by leading organizations and their training providers? What are they training on, who’s being trained, and how is this training being delivered, communicated and tracked?

Panel:

Erica Salmon Byrne, Assistant General Counsel & Managing Director, Compliance Advisory Services, Corpedia
Stella Raymaker, Director, Ethics & Equal Employment Opportunity Compliance, Waste Management
Loren Becher, Manager, Compliance Training and Communications, American Express
Howard Sklar, Anti-Corruption Counsel, Hewlett-Packard

Stella pointed out that a large percentage of her workforce is not connected tot he company through electronic messages. There is a difference in how you need to communicate with blue collar and white collar workers. Diversity is not just ethnicity and gender. Twitter is not going to reach everybody in your company.

Loren has a diversity with job functions at American Express. They had an enormous job just cataloging all of the compliance programs throughout her organization. They created a toolkit of materials for managers to use. They wanted to make it easier for managers to send the right message.

Howard has taken a risk-based approach to training and compliance at Hewlett-Packard. There is a conflict between centralized training and distributed training. They allow district managers to assign training to employees. There is still a set of required training based on job function. Formal training is just one aspect of compliance training. It’s all of the other messages sent to employees.

The panelists emphasized the need to have face for your compliance program. It’s important to get local champions. You don’t need them to be compliance experts. You need them to be able to spot the issue and be willing to ask the question to the expert, compliance person or legal counsel.

Howard pointed out the need to avoid “compliance training.” You need to have compliance built into business operation training. Training merely to “check the box” will not be effective.

It’s important to remember that not doing something also sends a message. If people do something wrong and do not suffer consequences that sends a message.

A practice note from the panel was to send out messages about the importance of training before the training session. Send out messages about recent failures of anti-money laundering in the news to people before they attend their anti-money laundering training. Training is expensive so you need to maximize the value to the company and the participants. Let them know the importance. Give them tools to help them better understand the issues in the context of your business.

One interesting challenge with training the board of directors is that for board members who sit on multiple boards they get training fatigue.

Doing More with Less: Compliance During Tough Economic Times

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

Let’s face it: compliance is usually seen as a cost center. While there’s been some good and interesting research about the positive impact on the business of a good ethical culture and brand, that message has not permeated everywhere. So in tough economic times, those responsible for their company’s compliance programs are forced to do more with less. How do you work with a smaller budget without sacrificing the quality or effectiveness of your efforts? And what are the best companies doing to demonstrate the value of and return on their own efforts?

Speakers:

Ronnie Kann, Managing Director, CELC, Corporate Executive Board
Alexandra Wrage, President, Trace International
Keith Abrams, Vice President & Associate General Counsel, Bayer NA
Dean Krehmeyer, Executive Director, Business Roundtable Institute for Corporate Ethics
Jeremy Wilson, Senior Manager, Ethics Office, Cisco Systems

Resource Allocation

Jeremy looked to collaboration to help maximize resources. Start by figuring out resources you have internally to limit external expenditures. Cisco has lots internal technology resources. Take advantage of your technology resources. They leverage internal social media tools to help communicate with employees and managers. Since they own WebEx they do lots of videoconferencing.

Dean is seeing the compliance and ethics trying to push activities upward to get boards and C-level executives more involved in their programs. There is an emphasis on making the business case.

Keith pointed out that there as much interest throughout organizations to do the right thing. The board is sometimes behind.

Alexandra pointed out that in a time of decreasing budgets, legal and compliance should not have a disproportionate cut. Working with shoddy partners and illegal conduct has real business costs.You need to make compliance business-relevant.

Enhancing the Program

Look to your peers and competitors to show what others are doing. Complying with regulations are important but meeting the level of your industry is even more important when the practice exceeds regulatory standards.

Storytelling is important. Stories are one of the best ways to demonstrate corporate culture.

Risk Management

The 2008 financial crisis had a much bigger financial loss than the Enron era wave of corporate governance changes. The outrage is bigger also. But we are not seeing as many perp-walks and prosecutions. The crisis may have been more about failures of risk management than a failure of corporate governance. You still need ethics and compliance to be a fundamental part of corporate operations.

We need to make it clear that bribery is not a victimless crime. It sometimes seems that it does not have the headline issues of environmental violations. Hopefully, the SEC and DOJ prosecutions will cause companies to focus on the dangers of bribery. The result is not just fines, but people are going to jail for bribery.

Broken Trust

How can your company help restore the public trust in it? It’s a business issue. You should have your ethics and compliance program show the lead in restoring that broken trust. Show your internal employees how you are restoring trust so it will be apparent externally. Empower your employees so they know the answers.

Strategic Implications

It’s hard to tap into the business processes. Compliance is usually outside the flow of business processes. Don’t talk “at” people. You need to engage them and have a dialogue. If the issues were easy, they wouldn’t be issues.

Alexandra points out that compliance has an important role when entering new markets. There are natural allies in the markets to help deter bribery. Bribery is theft and increases the costs to consumers. She has case studies and reports that shows that you can succeed by not paying bribes. You have to go with a strong message at the beginning. After the first time you pay a bribe, the government officials will line up with their hands out.

There are lots of stakeholders who were damaged by the current corporate ethics wave. More than the Enron-era corporate ethics wave. Companies need to find the balance between innovation and compliance. You don’t want to be a barrier to new business (as long as it is ethical and compliant.)

Global Insights into the Anti-Corruption Landscape

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

Dow Jones Risk & Compliance presents the results of a recent survey of current anti-corruption regulation, emerging trends and the impact on corporations around the world.The speaker was Rupert de Ruig, Managing Director, Risk and Compliance, Dow Jones & Company.

He started by looking back at 2009. He labeled the “year of the individual.” People were increasing being prosecuted and going to jail for compliance failures. There was an extension of control person to impose liability for supervisors/directors who were directly involved in the bad actions.

The United Kingdom is implementing a bribery bill. It’s expected to become law in 2010. The purpose is to make it more clear what is a bribe to make it easier to prosecute. It goes beyond the FCPA because it also covers bribes to private companies, not just public officials. It’s applicable if you have operations in the UK.

As corruption continues is some jurisdictions, companies are not entering the markets in those countries. Since the reach of the FCPA is extra-territorial, you need to be careful where you operate.

Equatorial Guinea Case Study

Rupert used this country as a case study. He pointed out the enormous wealth due to its oil reserves. That wealth has not made its way to the larger community. There is an oligarchy of officials that retain most of the wealth, largely through corruption. There is a need to better keep corrupt money out of the United States.

Bringing Corrupt Officials to Justice

652 senior government officials were arrested in 2009 for corruption, with 17 from North America, 138 from Africa, and 167 from Europe (including Eastern Europe and Russia).

Dow Jones State of Anti-Corruption

Dow Jones recently published their 2009 State of Anti-Corruption.

They found 30% of the survey takers said their company did not have an anti-corruption program.

They found that business expansion has been limited by the FCPA. They are concerned that the cost of bribery in some countries is too great. (I would guess that it is both the direct dollar cost and the cost of potential prosecution.)

A third of companies felt they lost business to a competitor who paid a bribe.

Tone at the Top: The Board’s Role

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

Understanding and supporting a prudent ethical and compliant tone throughout an organization is a core responsibility of the board of directors. Board actions are more transparent than ever to employees, investors, regulators, media and the general public. This session will discuss the challenges and keys to success for today’s boards. What are the responsibilities and associated liabilities of the Board for a company’s compliance? How can a board become actively involved in assuring employees, stakeholders and regulators that their organization is being proactive about ethics and compliance?

Speakers:

Thomas O’Neil, Advisor, WellCare Health Plans
C. Turney Stevens, Dean, College of Business, Lipscomb University
TK Kerstetter, President & CEO, Corporate Board Member

Turney started off by a need to focus on the tone throughout the organization. It is great to have the board of directors focused on integrity and ethics. But it is useless if that message does not reach down throughout the organization.

Thomas pointed out the need to view and get involved in company operations. They should not limit their involvement to meeting in the boardroom.

Watershed Events

The test of company’s culture is during a crisis. TK used the example of Wal-Mart, when the vice-chairman was found to be abusing gift cards. They had to set the culture and discipline that person (terminate?).

Overload

It can be overwhelming for a board to oversee all of the operations. They need to have faith in the organization. Directors need to get comfortable that the company is doing the right thing. Turney mentioned the work of Ben Heineman and his book High Performance with High Integrity. It is important to create some metrics to measure the process and the compliance program. Heineman came out of GE and its culture of measurement.

Cutting Corners

With the pressure of hitting budgets and performance goals, how do you temper this with the need to operate with integrity. The board needs to show that the employee was a rogue and that the company had the culture, operations and monitoring in place that would normally prevent the rogue employee from succeeding. You need to show that you were a reasonably prudent director. (Of course the standard for being a reasonably prudent director is a continually increasing standard.)

You need to temper “missing the numbers” and the need for integrity. How to reconcile these competing forces? It’s tough.

Going Public

Private equity firms need to do a better job on compliance, ethics and the “tone at the top” when preparing their portfolio companies to go public. There are the regulatory issues of course. But there is an increased pressure to make the numbers in the public markets.