Today marks the beginning of the 150th anniversary of one of the most seminal events in American history, the Battle of Gettysburg. It raged over three days from July 1-3 in southern Pennsylvania. It ended with a defeat of General Robert E. Lee’s Army of Northern Virginia and signaled the beginning of the end of the Civil War, the War Between the States for those of you who believe that the South legally succeeded or War of Northern Aggression for the unreconstructed among you. This week I will commemorate this battle and use an event from each day of the engagement as a starting point for a discussion of Foreign Corrupt Practices Act (FCPA) compliance.
Lee had not intended to fight at Gettysburg but did so largely because of the actions of his cavalry commander, General Jeb Stuart. Stuart was given orders to reconnoiter behind Union lines if he did not meet stout resistance. But Stuart’s key responsibility was to report Union troop movements to Lee. Stuart did meet such resistance from General Winfield Scott Hancock’s II Corps and was forced to swing some 60 miles around the Union troops. This effectively cut him off from Lee and took away his ability to report Union troop movements to Lee. One of the reasons that Lee ordered his men to gather at Gettysburg on July 1 was that he did not know the size of the Union force he was facing, eventually totaling over 91,000 men, because of this lack of intelligence. When Stuart finally arrived in Lee’s camp, late on the afternoon of July 2, Lee was reported to have said, “General Stuart, where have you been? I have not heard a word from you for days, and you the eyes and ears of my army.” According to another report, he simply said “Well, General Stuart, here you are at last.” In other words, Lee was not able to assess the risk he was facing and made a decision which put his Army at risk.
At the recent Corruption and Compliance Asia Congress 2013, there was a presentation by Derek Jackson, Director of GRC Asia Limited, in which he discussed leveraging corruption risk assessment data for effective compliance resourcing strategies. A large part of his discussion centered on the initiative by the International Organization for Standardization (ISO) to create principles and generic guidelines on risk management. This has been formalized in an initiative, denominated ISO 31000, which is designed provide a universally recognized calculus for compliance practitioners and companies employing risk management processes.
According to Jackson, one of the more interesting changes attempted in ISO 31000 is the modification in how risk is conceptualized. The definition of “risk” is no longer “chance or probability of loss”, but “the effect of uncertainty on objectives” … thus causing the word “risk” to refer to positive possibilities as well as negative ones. This change should allow a wider use of a risk assessment to evaluate a wider variety of situations.
Jackson said that the ISO 31000 risk management process is a four step progression. It all begins by establishing the context of your risk. According to ISO 31000, to establish the context means: “to define the external and internal parameters that organisations must consider when they manage risk.” To do so, the following steps are suggested: (a) define the scope of your risk management program, (b) formulate your risk management policy and, finally, (c) establish your risk criteria. Setting the context involves taking into account your business goals and capabilities as well as external factors, such as the changing legal environment and shifting social standards. In other words, you need to set the context to identify where your risks come from.
The next step is risk identification, which Jackson said was the process of determining risks that could potentially prevent the program, enterprise, or investment from achieving its objectives. It includes documenting and communicating the concern. He used this first step as a starting point for a discussion of several different types of risks which were not properly assessed. He used the Hewlett-Packard (HP) purchase of Autonomy as an example of strategy risk. He also detailed the Barings Bank implosion for the lack of recognizing process risk, the demise of Arthur Anderson for reputational risk, financial risk regarding Enron and WorldCom for fraud risk. Jackson emphasized that risk identification is an iterative process; in other words as the risk assessment progresses, more information will be gained and the risk statement will be adjusted to reflect the current understanding. New risks will be identified as the risk assessment progresses through the life cycle.
The next step is the risk analysis. Jackson said that risk analysis can be generally defined as a “process that is used to understand the nature, sources, and causes of the risks that you have identified and to estimate the level of risk. It is also used to study impacts and consequences and to examine the controls that currently exist. How detailed your risk analysis ought to be will depend upon the risk, the purpose of the analysis, the information you have, and the resources available.” Jackson emphasized that ISO 31000 does not create a tool for the creation of burdensome reporting on risk. Where possible, a company should use and leverage information that is already captured within the normal course of business operations and take the standard ties of human and cultural factors of the business into account.
The fourth step is the assessment or evaluation of the risk. Jackson said that this is the process used to compare risk analysis results with risk criteria in order to determine whether or not a specified level of risk is acceptable or tolerable. Risk evaluation then involves making a decision about the level of risk and the priority for attention through the application of the criteria developed when the context was established.
After the risk is identified, it should be managed or, in ISO 31000 parlance, treated. Risks are treated through controls, which are called risk controls. Jackson noted that ISO 31000 has an appendix of control steps. They involve selecting and implementing one or more treatment options. Once a risk treatment has been implemented, it becomes a control or it modifies your existing controls. They are listed as follows:
a) Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk;
b) Taking or increasing the risk in order to pursue an opportunity;
c) Removing the risk source;
d) Changing the likelihood;
e) Changing the consequences;
f) Sharing the risk with another party or parties (including contracts and risk ?nancing); and
g) Retaining the risk by informed decision.
Jackson concluded his remarks by noting that a company designs or revises its management system to suit its business processes, structure, risk pro?le and policies, and this is the purpose of its risk management plan. Large or complex organizations may require a hierarchy of risk management plans but there should always be an overall plan for the organization that describes the broad strategies to be utilized. This sounds quite a bit like the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance language which says that a company should assess its risk and manage its risk to create an effective FCPA compliance program.
So what about Jeb Stuart and his ill-fated romp around the Union lines? Many historians have argued it was one of the key factors which led to the Battle of Gettysburg because Lee was denuded of his ‘eyes and ears’ by Stuart’s mis-adventures. If this interpretation is correct, it surely shows the power of the ability to properly assess a risk or in General Robert E. Lee’s case, not having the ability to properly assess a risk may have led to the end of the Confederacy.
Tune in tomorrow for Day 2…