Part I - The Gatekeepers
Many Chief Compliance Officers (CCOs) came to the position from the legal department, internal audit or another professional discipline. These professions are technically focused and their training provides little to no soft skills training. Yet when one rises to the level of a CCO soft skills are at least equally important if not more important so than technical skills. Now overlay this need for soft skills with the focus from the Department of Justice’s (DOJ) FCPA Pilot Program on remediation as one of the four prongs required to achieve a fine and penalty reduction and the emphasis in the DOJ’s Evaluation of Corporate Compliance Programs (Evaluation) of operationalizing compliance; it is easy to see that the remediation phase is as important as the investigation phase.
Many have focused on the more technical aspects of the remediation component of a potential Foreign Corrupt Practices Act (FCPA) compliance violation. However, I wanted to explore the soft skills that a CCO must use, both internally and externally, to achieve the goals available under the Pilot Program, though extensive remediation. This week I begin a five-part series on what a CCO needs to consider when working through the remediation in the face of a FCPA investigation or allegation of FCPA violation.
I am joined in this exploration by Dan Chapman, well-known in the compliance community for his in-house compliance role a Baker Hughes Inc. and his CCO roles at Parker Drilling and Cameron International. In the latter two positions, Dan led both companies’ efforts to successful resolution of FCPA issues. Over the coming week, I will be considering five key soft skills, not taught in law schools or other professional schools, for every CCO to consider in the remediation phase of a FCPA inquiry. We will consider the following: (1) The Gatekeepers; (2) Project timing; (3) Communications with stakeholders; (4) When you are done? and (5) Post-resolution.
Chapman believes the first thing you need to begin with when faced with a FCPA investigation and remediation is to assess how the culture at the top of the company will affect your remediation efforts going forward. He noted, “I think the first thing that you want to do is, to gather an assessment or make an assessment regarding the culture at the top, and how it might affect remediation.” To do so, he advocated a three-step inquiry. The first question to consider is “who are your gatekeepers?” The second inquiry is into the level of focus the gatekeepers can give to the remediation. Finally, the third inquiry is to assess the gatekeepers understanding and knowledge of compliance.
A. Who are the gatekeepers?
While a company may have multiple gatekeepers, including the legal department, compliance function, Supply Chain (SC), Human Resources (HR) or Internal Audit (IA), you need to determine who makes the decisions regarding compliance issues. Some of the compliance activities Chapman suggested you consider are “investigations, training, due diligence, vendor selection, audits, and other compliance subject matters.”
Look beyond paper line reporting and assess lines of communications and information reporting structures to ascertain how decisions and actions are taken regarding compliance issues. Chapman provided the example of budget and spend where he said it is important to understand who authorizes compliance expenditures; the CCO, the Board or Audit Committee or the Chief Executive Officer (CEO) or perhaps other(s).
B. Level of gatekeeper focus
This inquiry delves into how much time, energy and focus the gatekeepers will be able to give to the compliance function and specifically the remediation. The gatekeeper focus can be a function of interest or of workload. The time of Boards and senior management is usually stretched to the limit, most particularly if large issues or decisions are looming. Often, it is not that the gatekeepers do not have the passion for the subject but they simply do not have the time to prioritize it. Chapman noted, “if a company is dealing with bankruptcy risk or is dealing with a significant corporate transaction such as they’re acquiring a company that is of the same size, that’s going to divert senior management’s time and they’re not going to be able to focus on compliance.”
C. Level of gatekeeper understanding
The third inquiry is to assess the level of compliance understanding of your company’s gatekeepers. Here you need to tread carefully because if gatekeepers believe they understand compliance yet have very little appreciation of best practices, doing compliance or the operationalization of compliance and are entrenched in their uninformed views, it may be difficult process to move the company to a point which meets the DOJ requirements for extensive remediation under the Pilot Program. You will need to determine if these gatekeepers will defer to you as the CCO and compliance subject matter expert (SME) or outside consultants as SMEs. Chapman believes the optimal situation is where the gatekeepers are highly knowledgeable but are willing to defer to the CCO as the compliance SME.
You will also need to understand the compliance structure of the organization. If the CCO reports directly to the Board or C-suite, it can allow a more rapid and unfettered response on remediation. However, if the company’s reporting structure is such that compliance reports to personnel at a lower level of the organization, Chapman believes this “can make real compliance change more difficult. Even worse is a situation where you have supervisory lines or organizational structures that infer that compliance decision making is in practice different from what one would expect based on those supervisory lines and organizational documents.” He noted such a structure is “a very dangerous thing.”
These three inquiries speak directly to the soft skills a CCO must have and must employ in this type of situation. Chapman noted, “interpersonal skills and the ability to read between the lines is essential.” Boards and C-Suite level executives are very busy with innumerable pulls on their time so you should respectful of both their time and in your communications with them. Being polite and courteous never hurts.
Knowing which questions to ask to allow you find out this information is critical so you can quickly assess whether someone is a gatekeeper and what is their level of compliance knowledge. Some of the questions he suggested to ask include “How do things really get done here? What are the lines of a communication when it comes to making decisions with respect to compliance? Are compliance personnel truly autonomous, do they have authority to get things done?” Chapman concluded this can be “a very delicate discussion, and one that senior management might not always want to have. Knowing how to push and how not to push in a way that is respectful of the commitments that the senior managers have is going to be critical.”
Part II - Project Timing
While noting this was only an initial step, Chapman believes the first thing you need to consider is “what are your goals” and that you should consider your long-term goals in developing your remediation plan. It begins with two considerations; the first is completing the project on time. The second is to maintain the confidence of the Board and C-Suite level executives.
The timing aspect is not only about your planning but also about setting expectations. You need to plan what you hope to achieve and then scale it out for timing. You must take care the overall length is not beyond what people expect. Chapman noted “If people have expectations that aren’t proper, you want to set them right.” And the sooner you set realistic expectations the better.
I found it interesting that Chapman emphasized confidence as a critical element for success. He noted, “maintaining confidence from your Board, maintaining the confidence of senior management and demonstrating some quick wins is important, because that will allow you to repeatedly show that you have accomplished things, things aren’t just lingering.” This also allows you to keep the confidence level high on the medium and longer term aspects of your remediation plan. You must maintain this confidence on both the medium and longer term deliverables of your remediation plan. Once again, as with timing, you need to ascertain that your stakeholders have the same view of high and lower risk that you do or expectations can become skewed.
To begin Chapman advocated to come right out of the box “burning the candle at both ends”, which he further articulated as “you want to attack the low hanging fruit, or the items that can be completed quickly” within six months. Simultaneously you need to begin on your longest-term remediation projects, such as those which might take up to two years. Then mix in medium term projects with a 12 to 18-month shelf life. With this approach, in six months you will have demonstrated some early successes, moved halfway through to completing some medium-term projects and then should be one-quarter of the way through the longest-term projects.
Chapman cautioned that throughout this time, you must communicate with the stakeholders and manage expectations. He said, “You have to communicate when you reach, before you reach that six-month period, by the way, we are going to get these six months, short term items and quick wins done, so we can show those to the government authorities, and then we are going to move into a period where we’ll begin our medium term, and we’ll continue progress on our longer-term projects, all of which will conclude around 24 months. I say this knowing that no one is going to want to hear that. If you are a board member you are going to say, “So then what you are saying to me is you are going to start up something that’s going to take two years to do.” You are going to do some things that will take six months, but after six months we are not going to see much progress for the next 18 months.”
You will need to overlay your planning process with the expectations of the stakeholders in another manner; which is around the high, medium and low risk categories of tasks. If your Board or C-Suite level executive “believes that training should be your highest profile and you disagree and you do nothing there until six or 12 months, but you didn’t think that optically, don’t appear so important, but you personally believe are important, you are going to lose the confidence of your Board.”
As a CCO, you should be cognizant of known-unknowns and unknown-unknowns in any remediation project during the pendency of a FCPA investigation. In the planning process, this means you need to plan time for the unknown which may become known to you during the investigation or through your remediation efforts. You need to budget time into your remediation plan for new matters which may arise, because, as Chapman succinctly noted, “that’s what we do in compliance.” Moreover, “If you develop a tight schedule in terms of your remediation plan, you should expect that you will not complete on time, because part of the remediation program necessarily is the discovery of areas of improvement and correction of those areas of improvement.”
Chapman concluded that you must plan for the unexpected and this requires close coordination with your investigative counsel if new matters are discovered which need to be added to your remediation list. It may be that some are high-profile and high-priority, which require more immediate attention. It may be that they can be placed into the medium-term or longer-term buckets for completion. The bottom line is that no CCO can predict on Day One what all the remediation issues will be. You may have a sense that you understand the overall problem or that you are only looking at the tip of the iceberg but you must resist the temptation to declare on Day One that you know what all the issues that require remediation are or will be going forward.
Part III - Communications with Stakeholders
You need to think through the timing of your communications and what is in those communications. Communications with stakeholders have multiple functions, but two key functions are (1) to report facts on the ground so the stakeholders are not surprised and (2) “to establish your credibility and build a level of trust.” Regarding the second point, Chapman notes, “The frequency of significant progress reports will slow as the ‘quick win’ opportunities become scarcer in the longer term. Therefore, your credibility and their level of trust in your ability to make progress will become more important over time.”
If you are engaged with highly focused gatekeepers, with a high level of compliance understanding, you can start off with relatively frequent meetings. Chapman noted, in the “beginning, as you are working through some of the short-term items, I think it may make sense to have more frequent meetings, whether it’s weekly, bi-weekly or monthly.” Here you once again must be respectful of the level of focus of your Board and C-Suite executives, and your communications should always be meaningful and substantive.
However, as you begin to move into the later phases of the remediation, your rate of specific project closures may slow as you move from the short to medium and longer term projects. Your frequency of meetings should probably lessen as well. One thing you do not want to have is a meeting where you essentially have little or nothing in the way of progress to report. There may be little benefit to both you as the CCO and the stakeholders. Chapman cautioned that too frequent meetings with too little progress to report could lead to the stakeholders wondering, “Is the CCO asking the stakeholders to do the CCO’s job? Are you asking them to make the decisions of a compliance expert? I found that it’s much healthier if the day to day running of the compliance function remains with the compliance experts, and Board members should receive reports and provide general oversight. In other words, they hold the CCO accountable, at a very high level, for the compliance function and, if they see something to which they object, they should object.”
Chapman cautioned he would “be conservative” in terms of frequency of communications. You want to make certain you have enough information to support a weekly call, but the pace will probably slow as you move through your remediation as you discover new issues, and they begin to consume more of your time. This can cause your rate of change to slow due to a number of issues that you are addressing in remediation. So, if you begin with 5 issues but then they expand to 15 or 20, this will require more substantive remediation, leaving less time for communications.
Once again, Chapman believes it is critical to set expectations that your rate of communications will slow during the pendency of the remediation. If you do so, this “will give confidence to your Board because they will look at the compliance officer and say, “He saw this coming. We now know that what he tells us is going to happen in the future will happen.”” You develop that credibility by correctly predicting what will happen.
Another issue which can arise in the communications area occurs when a Board member or C-Suite executive insists that an issue is high-priority where you have assessed it as low risk. If you move to remediate what you believe is clearly a secondary issue at best, it will consume both time and resources that you believe could have been used for more high-risk and high-priority remediation items. Yet, as the CCO you are required to address their concerns. Chapman suggested a couple of approaches to employ in this situation.
The first is “to let people know of your concern as politely as possible. Don’t stop reminding people of your concern. It is important to say something along the lines of “I understand that your compliance issue is critical, but this also is inhibiting our ability to deal with our FCPA remediation efforts.”” Because this requirement will take you away from more important high-risks that you have identified, “you must make tough decisions and be highly persuasive if you feel that you may be forced to spend time or resources on a non-risk-based basis.”
Another approach would be to try and address their concerns more directly but in a manner which does not detract from your time as CCO. This could mean additional resources be placed on the topic, such as training or another solution where you might be able to bring in an outside resource to try and deal with concern in a quick and efficient manner, while not diverting you too much from your higher assessed risks. But, as Chapman noted, “Ultimately, you will be held accountable, regardless of what the reasons or the excuses may have been, because in the real-world people do not care about the excuses, they care about performance.”
The frequency of communications and their quantum can be fluid throughout the remediation process. As a CCO, you will have multiple pulls and tugs on your time and resources. You will be required to navigate through many different paths and personalities. Managing your communications will be critical for both the long-term success of your remediation efforts and your efforts to move the compliance program forward.
Part IV - When Are You Done?
On this point Chapman was clear, you can never be done until after you have settled. Yet even at that point, your task is not fully completed as “Enforcement officials want to see continuous improvement, then monitoring.” He went on to note, “They want to see that a compliance program developed to the point it is sustainable and that it performs sufficiently. In other words, you have all your controls in place. Your controls have been tested and retested and retested, and retested - then improved after every testing cycle. It’s about laying the correct foundation and then continuously improving.”
Obviously, your remediation will begin with benchmarking, with industry peers and others to update your compliance with new policies and procedures, perhaps a Code of Conduct update and internal controls. All of this can be handled directly by the CCO as Project Manager (PM) or using outside specialists as an additional resource. Chapman believes it would largely depend on the subject matter and on the sensitivity. There are certain things the CCO and compliance function should accomplish, and there are tasks that could be outsourced out of the compliance department. Chapman’s mantra to overlay on all of this was “keep it simple”.
Chapman provided some examples. He said, “if we needed to update our chart of accounts to make it simpler or to prevent misleading entries, I would certainly get Finance involved. It would not be appropriate to demand that Finance do it without my input, and it would not be appropriate do it myself without Finance’s involvement. It would be a combination of efforts. If I needed to develop a due diligence program for third party representatives, that would probably be driven mainly by compliance personnel. On the other hand, if I needed to implement an onboarding training module, I may design the content but I may outsource its implementation and its management to HR. It really depends on the subject matter and the risk involved.”
Moving from internal communications with stakeholders to communications with the Department of Justice (DOJ) or the Securities and Exchange Commission (SEC), Chapman noted, “it’s wise to provide an update on remediation, even if brief, at every opportunity you get to talk to the government.” Given the expectations laid out in the written guidance released in conjunction with the Pilot Program, it appears that the DOJ want very focused and robust communications around your investigation and remediation. Chapman believes that you will very rarely, if ever, be in a situation where the government is purely focused on your investigation and at some later point, purely focused on your risk assessment or remediation. He said, “I think that every time you meet with them to talk about the investigation, you also should talk about the Company’s risks and how you’re remediating them.” Chapman also said that one thing which will come up in discussion with the DOJ is “you will be asked to discuss your compliance program, as it existed prior to or at the time of the wrongdoing and then any improvements and changes you have made.”
So, when are you able to go to the government and tell them you are “done” and you are ready to settle? Chapman responded that it is not his experience a company informs the government it is ready to settle but “what you can do is you can give the government a green light, but it’s up to the government to decide when they want to proceed to a final resolution.” He did note he believes a company can indicate to the government that the company is not yet ready to settle, stating, “You can say, “No,” but you can’t say, “Yes.” Settlement from the government side is often driven by their perspective of what you should do and, in many cases, their current caseload.”
Another question which may arise at this point is whether the government will require the company to employ an external monitor for some period after resolution. Chapman believes, if the company has demonstrated a commitment to compliance during the pendency of both the investigation and remediation and if the FCPA violations were isolated and not systemic to the organization, there is a lower chance of a monitorship being required by the government. Some of the indicia would include the amount of time and resources the company has devoted to developing its compliance program, whether the compliance program has reached the point of testing and monitoring, and whether that testing information results in compliance program improvements.
Chapman concluded with what he called the “Number One” thing to show the government: that you can monitor yourself. You do this by demonstrating “that you have advanced your compliance program to the point that you are testing yourself, and, not only are you testing yourself, you can demonstrate to the government that you have fully implemented corrective actions based on the results of that testing. In other words, you’ve created a feedback loop that shows continuous improvement.”
The ‘when are you done’ question may be one of the trickiest as it has so many moving parts. Understandably, there will be pressure from stakeholders to achieve closure and move forward. However, you do not want to represent to the government that you are ready to settle at a point when the government still does not believe you are ready. If you do, you may well risk receiving an independent monitor.
Part V - Post Resolution
If you have successfully navigated the four prongs of the Department of Justice’s (DOJ’s) 2016 FCPA Pilot Program of (1) self-disclosure; (2) extensive cooperation; (3) thorough remediation; and (4) profit disgorgement; you should have been able to make a resolution with the government. While you would certainly hope to achieve a declination with disgorgement, it may be there was a penalty assessed as well.
Whatever your result your company will, likely be required to have ongoing reporting obligations to the government. This can be in the form of an independent monitor, retained to ensure adherence to the obligations set forth in the resolution documents, such as Deferred Prosecution Agreement (DPA), Non-Prosecution Agreement (NPA) or other forms of settlement. It can also be the company reporting to the government on its continuing remediation efforts after resolution. In this area, I want to focus on two aspects, transparency and feedback, as I believe they are inter-related and tie into the DOJ’s 2017 Evaluation of Corporate Compliance Programs (Evaluation).
In transparency, this is something which should have overlaid your entire remediation effort and, indeed, your interactions with the government during the investigative phase. But this is not simply ‘opening the kimono’ to be open and honest with the government. In the post settlement phase this means having clear reporting lines for compliance. This is important so there is both accountability and action-ability. The accountability comes from know who to go to in an organization to implement and then enforce a compliance issue. In my final corporate position, that was one of the clearest requirements from our corporate monitor, demanding know who was responsible.
The corporate monitor wanted to know how compliance initiatives, monitoring and assessment were done on an ongoing basis, and he worked to assess that transparency. He made clear there should be not be any inconsistency between our company’s organizational charts, what supervisory lines would infer and what happened in practice. If there was an issue regarding the hiring of a third party, whether on the sales side or through the Supply Chain (SC), the monitor wanted to be able to go directly to the responsible person and determine if the compliance requirements had been fulfilled. He would do so via the written record and then follow up with an in-person interview. If the person interviewed had not done the appropriate compliance steps, it was immediately apparent.
This ties into the final topic noted by Chapman, feedback. When you consider the Evaluation’s emphasis on feedback through the questions it poses and the few public remarks of former DOJ Compliance Counsel Hui Chen; not only must you ask substantive questions and obtain data, but you must use that data as well. Two of the topics found under Prong 9 of the Evaluation (Continuous Improvement, Periodic Testing and Review) are as follows:
Control Testing – Has the company reviewed and audited its compliance program in the area relating to the misconduct, including testing of relevant controls, collection and analysis of compliance data, and interviews of employees and third-parties? How are the results reported and action items tracked? What control testing has the company generally undertaken?
Evolving Updates – How often has the company updated its risk assessments and reviewed its compliance policies, procedures, and practices? What steps has the company taken to determine whether policies/procedures/practices make sense for particular business segments/subsidiaries?
It is clear how important the DOJ considers this for any compliance program. For one just coming out of a FCPA enforcement action, it is even more critical.
Chapman emphasized this criticality in the post-settlement phase, noting, “you have to show that the feedback loop works by obtaining data through solid testing and taking corrective action based upon that data.” It is also critical that you “test your testing methods” to demonstrate that the validity of the data going into this feedback loop. Chapman noted that unfortunately “not a lot of people think about this,” but that it is critical. Chapman provided an example around the area of compliance training, stating “if you are using a questionnaire to assess the strength of training, you need to be able to show and demonstrate that your sample for gathering this data is sufficient. You simply did not ask five people about training when you’ve trained 2,000, that you did sample testing of at least, a reasonably appropriate percentage of trainees, and you need to be able to explain how you selected these trainees for their feedback and your survey methods used in developing and deploying the questionnaire.”
This type of information is clearly important when you begin your initial discussions with the government. Yet this requirement extends through the life of the enforcement action and into the post-settlement phase. Chapman concluded by saying, “You do have to show that your input into that feedback loop has been sufficiently tested and that your data is solid.” It is not limited to training but in all areas of your compliance program, as expressed in the Evaluation.
As Chen stated, in an interview with Matt Kelly on his podcast Radical Compliance, “We wanted people to see that we put a lot of emphasis on evidence and data. Don’t just tell us that you have a hotline. Show us how you know it’s working and how you’re using the information that you gain from these hotlines. When you say you have a great compliance portal, don’t just show us screenshots of it. Show us the hit rates and how you use that data to help you refine how you communicate with your audience.” The same is true for the requirement of strong leadership by senior management and tone from the top. Chen related, “If you tell us you have a strong, talented top, show us what concrete actions your leaders have taken personally to demonstrate that. It’s not just some words that they say” but show the evidence. That is the essence of a feedback loop.
I hope that you have enjoyed this week-long exploration of some of the key soft skills needed in any compliance program remediation. There are many offerings on the technical aspects of performing an extensive remediation during a FCPA investigation, but I think this series demonstrates that the soft skills not taught in law school or business school are equally important. This is yet another reason it is critical for any company which is facing such a challenge to have top notch compliance talent in the CCO seat and compliance function. My other suggestion would be for you to get in contact with Dan Chapman.