By Steve Priest, Founder of the Ethical Leadership GroupTM and Senior Advisor to Global Compliance, and Santiago Reich, Senior Consultant, the Ethical Leadership Group
Our crystal ball of ethics and compliance predictions has never been cloudier than at the end of 2011. Political priorities and public perceptions of institutions are traditionally predictive of the ethics and compliance environment. This year, however, inclement weather has been coming from all corners of the globe. In the absence of clear signals, the most reliable predictor for ethics and compliance in 2012 is what has already happened in 2011. Our recap of top trends and predictions follows.
1. No place to hide—ethics pressures are building globally.
In the United States, the Occupy Wall Street movement demonstrates distrust of large corporations. The Tea Party movement distrusts large government. Public opinion polls suggest most Americans have little trust in their elected officials—or much of anything else. This can only lead to increased pressures—public and private, formal and informal—to do the right thing.
In Europe, governments are falling and the viability of the Euro is being called into doubt. Taxpayers are looking for scapegoats and deep pockets and may find both in the guise of corporations. In the BRIC countries (Brazil, Russia, India and China), new ethics laws have been passed or are fiercely debated while large segments of the citizenry believe corruption is stunting progress.
Smaller companies increasingly find themselves under the scrutiny of their larger customers as misconduct, including bad labor practices, lapses in product safety, environmental malfeasance and bribery creates huge legal and reputational risks throughout the supply or commercial chain.
And investors are enforcing a form of ethics discipline as well. A suspicion of an insider trading scandal caused sophisticated investors to flee several prominent hedge funds this year. Chinese middle market companies lost billions of dollars in market capitalization over the past year as global investors lost trust in the integrity of their accounting practices and financial statements.
There appears to be no safe haven for those hoping to escape the global trend towards increased ethics and compliance demands from those who have felt its absence in the past.
2. Bribery enforcement is on the upswing around the world.
Rising enforcement of the US FCPA has garnered the most attention recently, as well it should. Eight of the top ten FCPA settlements of all time have occurred in the last two years. 2011 marked settlements with JGC of Japan ($211 million), Pfizer ($60 million) and Johnson and Johnson ($70 million). And in a development that should serve as a warning for individuals as well as corporations, Jeffrey Tesler, a UK citizen, forfeited $149 million in 2011.
Bribery enforcement goes well beyond the US, however. Russia, China and Brazil have recently passed anti-bribery laws that are, at least, tough on paper. One could argue that an unpredictable enforcement environment makes these laws even more dangerous for multinational corporations. And the UK has implemented a Bribery Act that is stricter than the FCPA. The first person sentenced under the law was a British clerk who took thousands of pounds from people who didn’t want to be prosecuted for driving offenses. He was convicted to a six year prison sentence. If a clerk taking a few thousand gets a six year sentence, what might we expect from million dollar bribes? We’ll most likely find out in 2012 given the pace of violations making headlines around the world.
3. When the government is your major customer, dot your i’s and cross your t’s.
Pharmaceutical companies continue to be hit with record-setting fines. Just this year, Merck agreed to pay $950 million and plead guilty to a criminal misdemeanor charge to resolve government allegations that the company illegally promoted its former painkiller Vioxx and deceived the government about the drug's safety. (This is on top of almost $5 billion previously paid to settle thousands of product-liability lawsuits.) GlaxoSmithKline agreed to pay $3 billion to resolve US criminal and civil investigations into whether the UK company marketed drugs for unapproved uses and other matters, its biggest legal settlement.
Pharma has been hit by billions in fines and settlements over the last few years. Whether the industry deserves it or not can be debated. However, when its major customer (the US government) is also its major regulator and when failure to settle can result in debarment from business with the US government, it is a difficult situation to negotiate. It is not pharma alone that faces this asymmetry. Many companies in defense, infrastructure, and aid and development have paid large fines and agreed to stringent corporate integrity agreements in order to avoid the corporate death penalty of debarment. With the public’s louder cries for accountability, expect more government inspection of those with whom it does business.
4. The line blurs between bad governance and bad ethics.
Olympus is the poster child for bad governance causing ethics problems—and being an ethics issue in and of itself. In a presentation to investors, Olympus itself identified multiple problems:
- The old guard stayed too long, serving as advisers even after stepping down.
- Too much power was vested in one person, who served as Chairman and CEO and appointed auditors and board members.
- The Board did not engage in proper oversight, exemplified by one member who said “I do attend board meetings but I have no idea about their content.”
- It was difficult to find truly independent, objective board members who were comfortable with challenging executives.
Poor governance is rampant in Japan but not isolated to the world’s third biggest economy. The HP board deserves dis-honorable mention for its hiring and firing of Leo Apotheker in less than a year, perhaps due in part to the fact that only four board members took the time to meet with their prospective new leader.
5. Compliance is not enough.
Your compliance quiz: What industry has devoted more money and people to compliance than any other? The answer: financial services. Look where it is in today’s headlines: vilified by Occupy Wall Street, distrusted by ordinary citizens, the butt of scorn on late night comedy television shows. Two examples from the financial services industry in 2011 serve to confirm that a compliance program absent a culture of integrity can be insufficient—and even dangerous:
Citigroup agreed to pay $285 million to settle claims that it misled clients about sub-prime loan securities it sold. Presumably with the OK of its lawyers and compliance officers, who are ubiquitous, Citigroup selected securities it believed had a high chance of failing, packaged them, and sold them to investors. When the securities performed as predicted, investors lost about $700 million while, according to the SEC, Citigroup reaped hundreds of millions of dollars in fees, trading profits, and payments from credit default swaps. While attorneys may have found the structure of the deal legally defensible, the SEC did not. A federal judge went further, rejecting on ethical grounds the standard language of the settlement in which Citigroup did not admit to wrongdoing. Judge Rakoff wrote that the case “… touches on the transparency of financial markets, whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.”
And a few blocks away, regulators have been unable to find about $1 billion in client money at MF Global. It does not take a compliance expert to know that you cannot use client money to hide firm losses. But this firm, run by former US Senator and New Jersey governor Jon Corzine, stands accused of doing just that. In addition, executives are being investigated for using insider information about the firm’s financial situation to unload MF Global convertible bonds before they lost value.
6. It is not only the crime—but also the response and the cover up that causes pain.
Much attention has been paid to the new SEC whistleblower program that provides incentives to individuals to report violations of securities laws. Whistleblower protections and incentives have been around for a long time. The bigger focus has long been on results and reputation.
The Board of Olympus demonstrated one way not to handle serious allegations: dismiss the CEO who raised them even though he had documented evidence to support fraud suspicions. Renault demonstrated another kind of failing: fire and publicly denounce individuals for selling confidential information before completing a thorough investigation. And in the US, a football program known for its ethical probity (Penn State) and a coach legendary for his ethics (Joe Paterno) fell under dark clouds because they failed to respond quickly or effectively to allegations of sexual abuse of children by a former assistant coach of the football team.
Only the first of these (Olympus) would most likely have been addressed by the SEC whistleblower program. But all of them underline the need for companies to have a strong anti-retaliation policy, an internal program emphasizing reporting responsibilities, and a real culture of integrity.
7. Insider trading rises as an enforcement priority.
While there have been notable insider trading convictions globally, the US Department of Justice has made prosecution of insider trading a major priority of late. Over two dozen people have been convicted in the last year. A billionaire who once ran the hedge fund Galleon, Raj Rajaratnam, was sentenced to 11 years in prison and fined $10 million. Rajat Gupta, the former head of the prestigious consulting firm McKinsey and board member of Goldman Sachs, Procter & Gamble, and American Airlines has been criminally charged. Networks of intelligence gatherers for financial institutions are under scrutiny. Expect more in the US and globally as enforcement agencies learn from each other and look for low hanging fruit. And, with the recent revelations of different practices regarding insider information for our elected officials in Congress, expect some interesting headlines and new regulations from Washington that will reverberate around the globe.
8. Antitrust enforcement continues at a high level.
The US DOJ has sued to block three mergers in 2011 alone (including the huge AT&T-TMobile deal), versus six deals in the previous decade. The European Union, of late the most vigorous of the competition enforcement authorities, continues to be aggressive, with Google the most recent large multinational under its microscope.
International cartels are the main priority of the EU, with one case from 2011 being a 315 million euro fine against major players in the detergent industry including Henkel, Procter & Gamble, and Unilever. Other recent cases around the globe make clear that collusion has scant refuge: Samsung, Sharp and six other LCD makers agreed to pay nearly $400 million to settle US price-fixing allegations, and Whirlpool units and Panasonic were fined over $200 million in an EU refrigerator compressor cartel case.
9. One bad apple can spoil the whole bunch.
2011 marked several more cases where one individual’s actions harm an entire organization. One rogue trader at UBS cost the firm $2.3 billion in bad trades, which led to the resignation of the CEO and loss of confidence in the firm’s ability to manage risk and compliance. Employees of the International Monetary Fund endured months of unwanted attention in the wake of the arrest of their Managing Director, Dominique Strauss-Kahn, on charges that he sexually assaulted a housekeeper in a New York hotel.
10. The watchers need watching.
A vigorous marketplace needs watching. In smaller markets and days gone by, customers could simply tell one another when a company was not trustworthy. Now we have regulators and courts; the media; non-governmental organizations of all stripes; and web-enabled ratings, evaluations and diatribes to keep companies on the straight and narrow. Unfortunately, these watchers need watching as well.
Just this year, we have observed the following troubling cases involving “the watchers”:
- The US SEC destroys documents against regulations.
- A federal judge throws out an FCPA conviction saying of the US DOJ, “The government team committed many wrongful acts. It should not be permitted to escape the consequences of that conduct.”
- Wikileaks releases non-redacted materials, jeopardizing the lives of many innocent people.
- A shadowy group of computer experts calling itself “Anonymous” pulls off massive coordinated and complex attacks on organizations around the world, including Sony, Visa, and the government of Egypt. They bring defense intelligence contractor HB Gary to its knees by hacking into its state-of-the-art systems, taking over its website and publishing confidential information about the company and its CEO.
Implications
Doctors, dentists, and oil change shops alike preach prevention to reduce problems later. But we continue to eat too much of the wrong things, exercise insufficiently, floss too little and defer oil changes on our cars.
Organizations are no different. Leaders know that strengthening a culture of integrity is a good investment and a high priority, but in the fast and stressful pace of other business, ethics and compliance efforts often get short shrift or become check-the-box exercises. The trends outlined above make it clear that companies that do business with governments, companies whose products or services impact public health or safety, medium or large organizations, and publicly traded companies all need to devote more attention to their cultures. This does not mean they need to “lawyer up” or engage in costly endeavors. It does mean that strengthening a culture of integrity with a strong and credible ethics and compliance program needs to be a corporate priority. Leaders throughout an organization need to be measured and rewarded when they create an environment where doing the right thing is the expected day-to-day behavior. Based on current conditions, we predict a stormy 2012.
Meet the Authors
Steve Priest is the Founder of the Ethical Leadership GroupTM and Senior Advisor to Global Compliance. The Ethical Leadership Group is the in-house Expert Advisory team at Global Compliance.
Steve was described by the Wall Street Journal as “one of the most sought consultants to keep companies on the straight and narrow.” He has conducted seminars on business ethics in 40 countries and speaks before organizations like the Conference Board, Institute of Internal Auditors, Association of General Counsels and the Ethics and Compliance Officer Association. Steve has raised awareness of the importance of ethical behavior on television, radio, newspaper and magazines.
Most of Steve’s work, however, is with corporate clients. Priest has consulted with 25% of the Fortune 200. The Codes of Conduct he has written are required reading for over one million employees around the world. His client list is filled with blue chip companies, including Honda of America, Abbott Laboratories, McDonald’s, Marathon Oil, Motorola and Sara Lee.
Prior to founding the Ethical Leadership Group in 1993, Steve Priest was for three years executive director of the Center for Ethics and Corporate Policy, a Chicago-based ethics think tank. Priest received his ethics training both in the real world of business and inside the ivy covered walls at Harvard University’s Divinity School, where he received a Master of Theological Studies degree. He has his MBA and BA from the University of Chicago and studied international organizational development in the Graduate Business School at the Katholieke University of Leuven in Belgium.
Santiago Zorzopulos Reich is a Senior Consultant at the Ethical Leadership Group. Prior to joining the company, Santiago was the Dubai Ethics Resource Center’s Manager of Programs where he helped launch the new Center and create its portfolio of products and services. His work in Dubai included: founding the Corporate Directors’ Leadership Forum, conducting a high-profile research program on ethics and corporate responsibility in the Gulf region, and implementing several client-specific projects for public and private organizations.
Prior to his position in Dubai, Santiago was the Manager of Corporate Responsibility Reporting at Chiquita Brands International where he wrote two award-winning corporate responsibility reports. These reports are available online at www.chiquita.com. Santiago began his career in ethics as the World Bank Group’s Business Ethics Research Specialist, where he worked on implementing world-class standards throughout the organization.
Santiago has been a speaker at several international conferences and events, including the World Accounting Summit, the second Middle East Corporate Social Responsibility Summit and the United Nations Conference on Trade and Development Experts’ Meeting.
Santiago holds a master’s degree from the American University in Washington, D.C., and a bachelor’s degree from the University of Illinois at Urbana-Champaign.
About Global Compliance
Global Compliance is the leading global provider of comprehensive, integrated corporate compliance solutions. Global Compliance serves small and large, public and private organizations by providing a full range of offerings necessary to achieve the highest degree of ethical behavior and corporate compliance. Our ethics and compliance services include Ethics Hotlines, Compliance and Ethics Training and Education including Preventing Sexual Harassment Training, Expert Advice from the Ethical Leadership Group - our business ethics consultants, Performance and Benchmarking, and Third Party Risk for vendor and supplier due diligence.