With the end of the Avon case fast approaching, the expected settlement of over $100 million includes some important lessons learned for companies in the middle of internal investigations and negotiations with the government.
The most recent lesson learned for companies under investigation is to avoid public negotiations with the government. It is always a no win proposition and typically results in a greater loss.
Avon disclosed that it had offered to the government to settle its long-standing FCPA investigation focusing on China for around $15 million. The government rejected the offer but Avon thought it could gain some leverage or influence by disclosing its position in public.
That was a serious mistake. Once a company breaches the confidentiality of negotiations with the government, you can rest assured that the government will no longer “trust” the company representatives to engage in serious and confidential negotiations, including important back and forth discussions and disagreements. The government will listen to a company and its representatives. Sometimes the government is persuaded by the company representatives – it is a give and take process and it depends on the confidentiality of the discussions.
When Avon decided to go public, that was a serious strategic error because it froze the negotiations and the underlying trust that is needed to have a free-flowing dialogue with the government prosecutors. As a former prosecutor, I can readily understand the government’s reaction to Avon’s public statement.
A second lesson learned from the Avon case is the importance of internal investigation oversight and management. Month after month huge expenses were disclosed for Avon’s internal investigation. The latest estimate is that the internal investigation and related costs exceeds $300 million. This amount is unjustifiable and reflects a failure of the corporate board and senior management to oversee the curtail, if appropriate, the legal fees and expenses.
I admit that I am not privy to what was required but given the size and scope of the problem under investigation there had to be more cost-effective techniques for completing the investigation. A corporate board cannot just rubber-stamp all internal investigation expenses without asking whether they are really appropriate. Somehow the board and senior management lost control of the case to the lawyers and other professionals.
In the end, the board has to be held accountable given its important oversight and monitoring responsibilities. Whether the Audit Committee or a Special Committee was appointed, the responsible committee should have asked some very tough questions and reviewed carefully the answers given. The failure to do so is further proof that Avon’s corporate governance capabilities may still be suffering, despite changes in leadership and remediation in practices.
Avon has some explaining to do to its shareholders as well as stock analysts. We all understand how a company can suffer a bribery scandal – that is nothing new. But perhaps more telling is Avon’s failure to manage the scandal in its internal investigations costs and its negotiations with the government. It is hard to argue that Avon now has a new corporate culture in place, especially when these fundamental errors occurred under the new regime’s watch.