SCCE Compliance and Ethics Institute – Eugene Soltes and How Compliance Programs Works

by Thomas Fox

The first full day of the SCCE 2017 Compliance and Ethics Institute (CEI) featured a talk by Eugene Soltes, an associate professor at Harvard Business School and author of “Why They Do It”. For this book Soltes spent over seven years interviewing some 50 prominent white-collar criminals to learn what made them tick, why they blew it all, and what, if anything, distinguishes them from us. He eventually got to know Ponzi schemers Bernard Madoff and Allen Stanford, former Tyco Chief Executive Officer (CEO) Dennis Kozlowski, Enron Chief Financial officer (CFO) Andy Fastow, ImClone CEO Samuel Waksal, McKinsey partner Anil Kumar, KPMG partner Scott London, and many others.

The book came from a rather innocuous source, the television show on MSNBC called Lockup – which he described as a cross between a reality and documentary show. The programs were about criminals, mostly violent offenders, but it got Soltes to wondering about nonviolent offenders, what made them do what they did to break the law and get convicted and why they did the acts which got them convicted. He wrote down the ten questions that came to mind and sent letters to several prominent white-collar criminals.

What I found most interesting was that many of the felons he interviewed could not accurately describe why they engaged in the conduct they did. Most of them were well to do, successful professionals who did not need the money. Why did they engage in the conduct? There was some rationalization along the lines of the fraud triangle’s three sides. But many seemed to point towards what fraud examiner Jonathan Marks says is really a Pentagon shaped fraud symbol where arrogance comes into play. Simply put the persons Soltes interviewed never thought they would get caught. Moreover, it never even entered their consciousness that they could be caught. Yet Soltes found they are largely like us.

In an interview in Fortune online by Roger Parloff, Soltes noted, “The main challenge that not just managers face, but that we all face as humans, is that we’re not hardwired to detect harm that we’re doing when the harm is distant. It’s not enough to know the difference between right and wrong. One should feel that one’s actions are harmful to avoid going forward. So take something like insider trading. You don’t see the victims. It’s impossible in many instances to identify who those victims are. So, it’s not surprising that if you engage in insider trading, there’s not going to be any internal alarm screaming out that you’re engaging in some extraordinarily heinous crime.”

Soltes went on to say, “There’s a trait associated with being a leader of any large firm. We have people who are CEOs and CFOs come regularly to Harvard Business School and there’s a lot of similarities. You don’t become head of large firm by luck. There are some characteristics of temperament that allow you to get there. Temperament, discipline, and self-control are crucial.I see momentary lapses of self-control and restraint as being one of the things that undermined the executives in my book. They showed discipline and self-control for decades. But we all have momentary lapses.”

For the compliance professional, the question is how does this impact a bestpractices compliance program? There is one school of thought that says 5% of your employee base can never be reached through training. Basically, they must be written off as you will never be able to communicate ethical values to them. If you accept this as true, the response is that another part of your compliance program must compensate for this deficiency. The way to make up for this is to have a more robust hiring program, focusing on the compliance and ethical background of your high-risk candidate, meaning those which could put your company at risk for compliance violations, stealing money through fraud or other conduct which might damage the reputation of your organization.

This is also where the process of compliance is so important. It means having internal controls in place to pick up and detect such conduct. It also means having oversight or a second set of eyes as process validation of your program going forward. It can also mean putting a process in place where the person who is about to engage in illegal conduct can be made to see how their actions going forward will have consequences. Soltes said that a compliance process can help them to be in a place that they not only need to be in but want to be. He pointed to the recent Nobel Prize award to behavioral economist Richard Thaler to illustrate the point that in many ways compliance and ethics programs are behavioral engineering, helping to nudge people to act as they see themselves; basically, as honest hard working individuals.

It was this final takeaway that I found so powerful. Your compliance program is not simply a set of rules and regulations but one that influences behavior. This insight explains why there should not be a compliance defense appended to anti-corruptions laws such as the Foreign Corrupt Practices Act (FCPA). For it is only in the operationalization of compliance that a program moves towards this type of influencing. Just as Thaler’s research informs the modern compliance program, Soltes work also demonstrates that is through the doing of compliance that a program can function on all levels.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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