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I continue my Great Structures Week with focus on great structural engineering and its innovations in the medieval world – that being the Gothic Cathedral. I am drawing these posts from The Great Course offering, entitled “Understanding the World’s Greatest Structures: Science and Innovation from Antiquity to Modernity”, taught by Professor Stephen Ressler. When it comes to Gothic Cathedrals, Ressler notes that they are a rich case study in the development of “architecture and the limits of empirical design, literally written into the walls of the buildings.”

The innovation of the Gothic Cathedral was to use elements of the Roman basilica but to add “height and light, featuring ever taller naves, pierced by ever-larger clerestory windows, and delineated by ever-more-slender engaged columns”. The first innovation came with the pointed arch followed by ribbing on the columns to help stiffen and strength them more effectively. However the truly dynamic innovation was the creation of flying buttresses, which were huge additional columns outside the structure yet were designed to become load-bearing members so the highest point inside the cathedrals could be filled by light through ornately stained glass windows. Two of the finest examples of these Gothic Cathedrals are both found in France. They are the Cathedral of Our Lady at Chartres and Cathedral of St. Stephens at Bourges.

Just as the medieval world built up the structural engineering techniques from their forebears, as your compliance regime matures you can implement more sophisticated strategies to make your Foreign Corrupt Practices Act (FCPA) compliance program a part of the way your company does business. Using an article in the Spring 2014 issue of the MIT Sloan Management Review, entitled “Combining Purpose with Profits”, as a basis, I have developed six core principles for incentives, for the compliance function in a best practices compliance program.

1. Compliance incentives don’t have to be elaborate or novel. The first point is that there are only a limited number of compliance incentives that a company can meaningfully target. Evidence suggests the successful companies are the ones that were able to translate pedestrian-sounding compliance incentive goals into consistent and committed action.
2. Compliance incentives need supporting systems if they are to stick. People take cues from those around them, but people are fickle and easily confused, and gain and hedonic goals can quickly drive out compliance incentives. This means that you will need to construct a compliance function that provides a support system to help them operationalize their pro-incentives at different levels, and thereby make them stick. The specific systems which support incentives can be created specifically to your company but the key point is that they are delivered consistently because it signals that management is sincere.
3. Support systems are needed to reinforce compliance incentives. One important form of a supporting system for compliance incentives “Is to incorporate tangible manifestations of the company’s pro-social goals into the day-to-day work of employees.” Make the rewards visible. As stated in the FCPA Guidance, “Beyond financial incentives, some companies have highlighted compliance within their organizations by recognizing compliance professionals and internal audit staff. Others have made working in the company’s compliance organization a way to advance an employee’s career.”
4. Compliance incentives need a “counterweight” to endure. Goal-framing theory shows how easy it is for compliance incentives to be driven out by gain or hedonic goals, so even with the types of supporting systems it is quite common to see executives bowing to short-term financial pressures. Thus, a key factor in creating enduring compliance incentives is a “counterweight”; that is, any institutional mechanism that exists to enforce a continued focus on a nonfinancial goal. This means that in any financial downturn compliance incentives are not the first thing that gets thrown out the window and if my oft-cited hypothetical foreign Regional Manager misses his number for two quarters, he does not get fired. So the key is that the counterweight has real influence; it must hold the leader to account.
5. Compliance incentive alignment works in an oblique, not linear, way. The authors state, “In most companies, there is an implicit belief that all activities should be aligned in a linear and logical way, from a clear end point back to the starting point. The language used — from cascading goals to key performance indicators — is designed to reinforce this notion of alignment. But goal-framing theory suggests that the most successful companies are balancing multiple objectives (pro-social goals, gain goals, hedonic goals) that are not entirely compatible with one another, which makes a simple linear approach very hard to sustain.” What does this mean in practical terms for your compliance program? If you want your employees to align around compliance incentives, your company will have to “eschew narrow, linear thinking, and instead provide more scope for them to choose their own oblique pathway.” This means emphasizing compliance as part of your company’s DNA on a consistent basis — “the intention being that by encouraging individuals to do “good,” their collective effort leads, seemingly as a side-effect, to better financial results. The logic of “[compliance first], profitability second” needs to find its way deeply into the collective psyche of the company.”
6. Compliance incentive initiatives can be implemented at all levels. Who at your company is responsible for pursuing compliance incentives? If you head up a division or business unit, it is clearly your job to define what your pro-social goals are and to put in place the supporting structures and systems described here. But what if you are lower in the corporate hierarchy? It is tempting to think this is “someone else’s problem,” but actually there is no reason why you cannot follow your own version of the same process.

Looking for some specific compliance obligations to measure against? You could start with the following examples of compliance obligations that are measured and evaluated.

For Senior Management

• Lead by example in your own conduct and in the decisions you take, to the resources and time you commit to compliance.
• Facilitate and proactively practice in day-to-day activities the key compliance competencies, both internally and externally.
• Support specific initiatives from the Chief Executive Officer (CEO), legal and compliance functions. 

For Middle Management

• Demonstrate, facilitate and proactively practice in day-to-day activities the key compliance competencies, both internally and externally.
• Support specific initiatives from the legal and compliance functions.
• Ensure that all employees, agents and contractors directly or indirectly reporting to you fully complete all required training and communications in a timely manner.
• Provide full cooperation with investigations conducted by the compliance or legal functions of any alleged violation of compliance policies.
• Include the Chief Compliance Officer (CCO) or another legal or compliance function representative in your management meetings at least twice per year, per geography.
• Identify instances of non-compliance and support compliance monitoring and reporting systems.Partner with compliance in resolving compliance issues.

For Business Development or Company Sales Representatives

• Certify that all employees, agents and contractors directly or indirectly reporting to you have fully reported all sales and marketing interactions with all government officials in a timely manner.
• Certify that all employees, agents and contractors directly or indirectly reporting to you have fully, promptly and accurately reported all expenses with third party sales representatives have occurred.

The Gothic Cathedral is one of the greatest structural engineering feats mankind has ever created. It combined a dimension of height not surpassed for nearly 1000 years with an ingress of light not previous seen in structures. This use of light facilitated the development of the artistry of stained-glass windows.

For a review of what goes into the incentive structures of a best practices compliance program, I would suggest you check my book Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program, which is available through Compliance Week. You can review the book and obtain a copy 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, 2015

 

 

Ed. Note-I received the attached guest blog post. I certainly found it interesting that in the UK there might be a view of Ben Lawsky and Eric Holder as heroes for their fights against the banking industry. So presented for your Friday consideration: Do they deserve to be called heroes?

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Eric H. Holder and Benjamin M. Lawsky are names that you may not be familiar with, yet they’re fast becoming known as banking’s most feared men. Together, the men have issued numerous multibillion dollar fines to US and international banking institutions who have been accused of illegal or irresponsible actions.

Eric H. Holder worked as a United States Attorney before serving as a judge for the Superior Court of the District of Columbia. In 1997, he became Deputy Attorney General under the Clinton administration, and was elected as the country’s first African American US Attorney General in 2009, working under the Obama administration.

Like Holder, Benjamin M. Lawsky began his career as a United States Attorney, before becoming Chief Counsel to Senator Charles E. Schumer in Washington DC. However, Lawsky really made a name for himself back in 2011 when he became New York State’s first Superintendent of Financial Services. Lawsky is commonly referred to as a ‘Wall Street Cop’.

What Are Holder & Lawsky Aiming For?

Holder and Lawsky, although frequently grouped together due to their similar roles as the new ‘heroes of banking’, have taken different focuses in terms of bringing regulation back to the financial world. Holder has shown a dedication to many US and global banking institutions’ potential contribution to the 2009 financial crisis, which only recently has shown signs of recovery. The recession has had a significant impact on people all around the world, and Holder believes that the actions of major banks – trusted institutions – may have contributed significantly to the crisis. Holder has been focusing his attention on banks that may have concealed valuable information from investors at the time, and who demonstrated an ignorance of the market despite ongoing warnings regarding the state of the economy.

Lawsky, on the other hand, as Superintendent of Financial Services for New York, is more focused upon the lack of financial regulation not only within New York, but across the United States. It’s no secret that many regulators and Government officials have become what some might describe as ‘corrupt’, or, at the very least, consumed by the industry (evident in the fact that many illegal schemes already uncovered have been in place for decades and have apparently gone unnoticed until now). Currently, many financial institutions do not have anti-corruption policies in place, blamed on the unclear expectations of regulators. Even in terms of regulators who have been working above board, reports suggest that federal agents have acted too slowly to make a difference. One of the main reasons Lawsky has made such a name for himself is because he ‘went rogue’ and filed his own paperwork against banks.

What both Holder and Lawsky want is for illegal activity to be as it should be – illegal. However, they also want individuals to take responsibility for their actions. As Lawsky says, “If a bank commits a criminal act or if a bank commits serious regulatory violations, someone within that bank did it. The corporation is an inanimate thing”. This is reflected in Lawsky’s previous behaviour – although he has threatened multiple times to strip a bank of its licence, he is yet to do so.

Previously what has Lawsky done – is this a sign of what is to come in future years? Essentially is it possible that his past actions, which have not been followed through, represent what course of action he plans to take in the future. 

How is the Financial World Set to Change?

Between them, Holder and Lawsky have already made some dramatic changes to the financial world, uncovering numerous money laundering schemes and encouraging banks to admit to irresponsible behaviour. So far, we’ve seen Holder get Citibank to pay out $7 billion for approving mortgages to poor credit applicants prior to the financial crisis, we’ve seen Credit Suisse’s’ 20 year tax evasion scheme come to light, and we’ve seen Lawsky collect the largest lump sum settlement in the history of NY regulators, with Standard Chartered paying out $340 billion in relation to $250 billion worth of illegal transactions disguised as just $14 billion.

Is Lawsky more of a threat than Holder?

Is Holder playing it safe by going after banks that concealed valuable information from investors?

Is Holder focusing on the lesser threat of concealment, rather than greater threat of lacking AML systems in banks?

Is Lawsky looking to make examples out of banks rather than punish them criminally and/or ruin their business/reputation?

The actions of Holder and Lawsky aren’t expected to transform the financial world instantaneously. Instead, small changes are expected at first, such as alterations in life insurance deals to prevent ‘shadow insurance’ – where companies are using funds for multiple purposes and not retaining enough to repay clients. Bigger changes are to be expected in the long term (such as?). Lawsky acknowledges that some schemes are very well hidden, but become more transparent over time. The effects of Holder and Lawsky are anticipated to be evident for decades.

Some additional questions for your consideration. 

• Are the punishments harsh enough?
  • Fines vs. criminal charges/damage to business

Heroes?

• Lawsky more so than Holder – going out on his own, taking matters into his own hands – unafraid to fight for what is right
  • Holder working alongside DoJ – does he have free reign to take action on the banks or does he have to be abide by the DOJ’s rules and regulations. Resulting in reduced punishments for the corporations?