FIFA Indictments, Corporate Compliance, Alfred Kinsey and Robert Lee

Shaving too close.

Shaving too close.

Law360’s Zachary Zagger has a nice piece on the FIFA prosecution and quotes, among others, Jack Sharman:

“Given this many defendants and the fact that there is going to be at least some who are going to cooperate, it would not surprise me if there wasn’t a second wave of charges or people coming out of the woodwork, people you have not heard of yet,” said Jackson R. Sharman III, a white collar criminal defense attorney with Lightfoot Franklin & White LLC.

“If it is going to survive, it is going to have to have a more rigorous compliance structure than some of the items that have come across thus far,” Sharman said suggesting that it may need to create something like a corporate board of directors or an inspector general-type official to address compliance issues directly.

Here is a link to the full article:  3 Things To Watch Out For In The FIFA Corruption Case

Compliance drill.

Compliance drill.

We have spoken with the Wall Street Journal previously about the FIFA case: FIFA Indictments and the Notion of Global Compliance:

Jackson Sharman, a white collar specialist at Lightfoot, Franklin & White LLC, says that the case shows that the notion of a swelling, global compliance culture may be exaggerated. Attorneys and compliance professionals often make the mistake of believing their concerns about bribery are representative of the organizations where they work, he said. “It’s dangerous to assume that a legal regime is being internalized by everybody, because clearly it’s not,” Mr. Sharman said. “Assuming that others think the same way as you think can be fatal.”

Setting others aside, it can also be fatal to your enterprise if you fail to understand how you going about thinking through compliance questions.

Robert Edward Lee

Robert Edward Lee

Much has been made recently of Confederate images and names.  On the compliance front, I invoked Robert E. Lee last year in a post about McKinsey, General Lee and the Culture of Compliance:

Except perhaps for “paradigm” and “silo,” the word “culture” is one of the most abused in the vocabulary of compliance, ethics and consultants.  (I once heard a consultant say that he needed “a high hover over the silos.”  I thought it an ironic mash-up about drones and agriculture; it was not).  Yet, “culture” has a meaning in the broader world; in commerce; and in compliance.  “Culture” represents a gear-shift in compliance and ethics, and can be smooth or bone-rattling.

 

Not Robert Edward Lee.

Not Robert Edward Lee.

(For the careless reader, note that the title refers to McKinsey, the consulting firm, not to Alfred Kinsey, the sex researcher).

 

 

Global or domestic, “compliance” comes in three flavors — criminal, civil and regulatory.  Sometimes, you get a mouthful of all three at once.

Why is that?  And, what to do about it?

A few thoughts here:

 


McKinsey, General Lee and the Culture of Compliance

Except perhaps for “paradigm” and “silo,” the word “culture” is one of the most abused in the vocabulary of compliance, ethics and consultants.  (I once heard a consultant say that he needed “a high hover over the silos.”  I thought it an ironic mash-up about drones and agriculture; it was not).  Yet, “culture” has a meaning in the broader world; in commerce; and in compliance.  “Culture” represents a gear-shift in compliance and ethics, and can be smooth or bone-rattling.

McKinsey

McKinsey

Consider this story about  McKinsey’s culture in the wake of insider-trading scandals:

For a quarter of a century, except for a brief stint as a currency analyst at Rothschild, Mr. Barton has worked at McKinsey, the consulting firm with more than 1,400 partners and 18,500 employees around the world. And that is why he is facing the most daunting task of his career: as McKinsey’s global managing director, he is trying to change the culture of the firm that shaped him.

There are two reasons that Mr. Barton is on this mission: Anil Kumar and Rajat K. Gupta. Mr. Kumar was a McKinsey director who, in 2010, pleaded guilty to insider trading charges and publicly acknowledged giving corporate secrets gleaned on the job to Raj Rajaratnam, a founder of the Galleon Group hedge fund, in return for cash. Never in the history of the firm had a partner been charged with violating securities laws.

A year after the Kumar scandal, the Securities and Exchange Commission filed a civil complaint accusing Mr. Gupta, a Goldman Sachs board member and former McKinsey managing director, of telling Mr. Rajaratnam about a $5 billion investment in Goldman by Warren E. Buffett’s Berkshire Hathaway at the height of the financial crisis. Mr. Gupta, a revered former partner who had been elected managing director three times in a row, serving at the helm for a decade, was ultimately convicted of criminal charges of leaking boardroom business. He awaits the outcome of his appeal, even as insider trading charges continue to occupy prosecutors. The trial of Mathew Martoma, a former trader at SAC Capital Advisors, run by Steven A. Cohen, started last week in Manhattan, not long after another SAC trader, Michael S. Steinberg, was convicted of trading on corporate secrets. SAC itself pleaded guilty in November to violating insider trading laws.

So where does that lead Mr. Barton?

At McKinsey, Mr. Barton has been trying to prevent another disgrace: a “third man,” as some have put it. McKinsey is known for what it calls its culture based on values and trust — a culture that was created and nurtured by Marvin Bower, its longtime managing director. The values that Mr. Bower instilled included putting the clients’ interests above the firm’s, providing independent advice and keeping confidences. These ideas were imparted from one generation to the next, mentor to apprentice. But after Mr. Kumar’s arrest in late 2009, Mr. Barton, who had been elected to head the firm just months earlier, decided that the honor-driven, values-based system was not enough. What the firm needed was some rules.

“We needed more safety moats around the castle,” he says. “We have this values/trust culture. I get that. Now we have a little more edge.”

The rest of the article details why some in the firm think this a great idea while others pan it.

Multiple rules in the compliance handbook.

Multiple rules in the compliance handbook.

Given the size and diversity of his organization, I applaud Mr. Barton.  For better or for worse, if there is no more “values/trust culture” to be poured in from the top, then the only reasonable thing to do is add “a little more edge.”  Like edging your lawn: it seems to grow luxuriantly by itself, but you don’t want grass clogging the sidewalk.

On the other hand, rules — especially rules that are applied to thousands or tens of thousands of employees, perhaps in dozens of countries — are blunt instruments.  They hack at the lawn, rather than trim it.  In addition, people sometimes revolt against the governing values, but they always revolt against the governing rules.  Finally, the rules do a much better job of describing how you transgress than how you non-transgress.

The Collonade.

The Colonade at W&L

Consider the example of my alma mater, Washington & Lee University in Lexington, Virginia and the Honor System created by President (formerly General) Lee:

The mid-1800s saw the development of honor systems at many colleges. Lee replaced the elaborate disciplinary rules of Washington College by a single standard: “Every student must be a gentleman.” He intended for the young men under his charge to acquire a sense of responsibility based on truth, honor, and courtesy. Lee also placed a premium on civility and spoke to each student as he passed him on campus, encouraging by his example the same show of respect between students.

Today’s honor system, administered by students, has been a unique feature of Washington and Lee University for well over a century. It is based on the fundamental principle of mutual trust among students, faculty, and staff that students attending Washington and Lee will not lie, cheat, steal, or otherwise act dishonorably. With the rule of civility, exemplified by the W&L “speaking tradition,” Lee’s legacy of honor continues to permeate academic and social life at Washington and Lee University and serves as a model nationwide.

 

An Honor System works well at W&L and poorly at many other universities for several reasons.  Some of those reasons illumine the strengths and weaknesses of many corporate compliance programs.

Robert Edward Lee

Robert Edward Lee

First, as implied above, it is a system, not a code:

Young gentleman, we have no printed rules here.  We have but one rule and that is that every student must be a gentleman.

— Robert E. Lee to student Wallace E. Colyar (1866)

Although there are more rules and regulations today in Lexington than there were formerly, the Honor System coalesces around a concept (‘honor”) rather than dividing between thou shalts and thou shalt nots.  Despite lip-service to soft concepts in compliance programs, most come down to crypto-Scriptural commands.

Second, the Honor System is single-sanction.  There is one penalty — dismissal — without regard to the severity of the offense.  In other words, it does not seek proportional justice.  Most corporate compliance officers who tried a single-sanction system would get fired.

Third, it marries two starchy concepts: “honor” and “duty.”  President Lee cherished the latter as much as the former:

The forbearing use of power does not only form a touchstone, but the manner in which an individual enjoys certain advantages over others is a test of a true gentleman.

The power which the strong have over the weak, the employer over the employed, the educated over the unlettered, the experienced over the confiding, even the clever over the silly–the forbearing or inoffensive use of all this power or authority, or a total abstinence from it when the case admits it, will show the men in a plain light.

The gentleman does not needlessly and unnecessarily remind an offender of a wrong he may have committed against him. He cannot only forgive, he can forget; and he strives for that nobleness of self and mildness of character which impart sufficient strength to let the past be but the past. A true man of honor feels humbled when he cannot help humbling others.

“Duty,” for many employees in highly-diversified, extremely large global organizations is a term roughly co-extensive with “pay.”

Fourth,Washington & Lee is a liberal-arts college, not the org-chart Tower of Babel that many large-company compliance officers must deal with.  Coalescing around a concept (like “honor” or “duty”) rather than submitting to a rule or a checklist is easier when at least a core group is composed of individuals who possess more experiences, taboos, creeds and rituals that unite them than divide them.  (Or, at a minimum, they perceive such to be the case).

Corporate compliance programs cannot readily have the grace of the Washington & Lee Honor System — much as (a biased alumnus says) the corporate officer, director or employee without the benefit of a W&L education cannot readily have the grace of a W&L alum.  Both require work; both produce imperfection.  But, as the effort of McKinsey’s Mr. Barton demonstrates, both are commendable.