Author: Compliance Culture

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Compliance and ethics business case studies

THINX, Miki Agrawal, and the immature leadership of a visionary entrepreneur

THINX was founded by Miki Agrawal with the ambition of disrupting the feminine hygiene industry. The company makes underwear specially designed to be worn by women on their menstrual periods. In line with this female-centered product and its revolutionary approach to a timeless need, THINX has a mission to re-center the public discussion about periods and women’s bodies. The company has become known for its provocative, bold advertising campaigns on the internet and in the New York City subway.

However, the company has also become known for something less progressive: allegations that its founder-CEO Agrawal created a hostile work environment with inappropriate behaviour and insufficient management controls.

THINX started with the objective to normalize the way people talk about periods, making it no longer a taboo topic. This societal change is an admirable goal, but at THINX it was undermined by an immature compliance culture that perverted this openness into permissiveness for mistreatment and poor conduct. It may be a positive societal change to open and encourage dialogs about feminine hygiene practices and women’s bodies, but the standards for treatment of others and respect for people’s personal boundaries, everywhere in life but especially in the work place, should not be subverted in interests of promoting this message. Empowering women does not stop at the office door, especially in a company with this ambition as its supposed core value.

Agrawal, who has successfully started several businesses, has not been so successful in taking a professional approach to ongoing operations at those organizations. Her ideas and approaches to entrepreneurship may be disruptive in a good way – novel, unique, bold – but her management style appears disruptive in a bad way – immature, overly casual, confrontational. Personal conduct and character ethic should distinguish the profile of a CEO, not tarnish it. A true leader should focus his or her philosophy into appropriate behaviour and interactions with employees and a tone at the top of professional integrity.

Despite Agrawal’s own behaviour that crossed the line, she could have made up for her managerial shortcomings by placing people around her whose leadership could contribute to a more acceptable corporate tone for the employees while still servicing the cultural change Agrawal wanted to encourage in the world at large. Adequate management controls such as a formal, experienced HR department and written employee policies and procedures would have helped to set a standard towards which the company could mature.

THINX replaced Agrawal as CEO with Maria Molland Selby, a more traditional leader who was worked in a variety of established companies included Thomas Reuters and Dow Jones. Selby also is a passionate about the THINX product from a personal perspective, hopefully she can value the people working at THINX as individuals by treating them positively and focus on a corporate culture that will support the company’s goals of destigmatizing feminine and changing the product market to make it better. As for Agrawal, she has rebranded herself as a SHE-eo and a disrupt-“her,” indicating that her interest is really on focusing on her perceived positive accomplishments and the future, rather than learning from the criticisms of the past, which she perceives as obstacles or tests rather than self-created challenges or failures to mature.

For more detail on THINX and Miki Agrawal, read Noreen Malone’s story on The Cut.

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Compliance in current and historical events

The bankruptcy of Lehman Brothers

For over 150 years, Lehman Brothers Holdings Inc. was one of the largest financial services organizations in the world. In the United States it had far-reaching business operations in investment banking, securities sales and trading, research and analysis, asset and wealth management, and private equity investments.

Despite this long history, in the early 2000s Lehman Brothers was deeply impaired by the firm’s involvement in the subprime mortgage market, the impending bursting bubble of which precipitated the 2008 global financial crisis. Losing clients, market value, and rating status rapidly, Lehman Brothers filed for bankruptcy on September 16, 2008. This date is often seen as the impetus of the subsequent financial crisis, when widespread, sustained market collapse commenced.

The Lehman Brothers businesses were almost immediately taken over by Barclays in North America and Nomura Holdings elsewhere in the world. However, the impact of the bankruptcy was seismic. It had a strong effect both in concrete terms of losses in the financial markets and stress to the economy as well as a symbolic effect in representing the “too big to fail” categorization that troubled the global financial system and the many large firms within in that suffered great losses during the ensuing crisis.

  • A Colossal Failure of Common Sense – Also a best-selling book by Lawrence G. McDonald with Patrick Robinson, this lecture goes into great detail of the events leading up to, during, and following the Lehman Brothers bankruptcy during the years 2007-2010. The study goes even further back as well, to unpack the changes in financial regulation and banking industry laws from the 1990s which allowed the business conditions under which products like the subprime mortages and resulting securities were created and sold.
  • The Last Days of Lehman Brothers: Moral Hazard – This film dramatizes the events of the weekend leading up to, and in hopes of preventing, the eventual bankruptcy of Lehman Brothers. The subtitle “moral hazard” refers to the situation in which precarious risk calculations are made by individuals who do not face the liability and/or loss if the decision was the wrong one.   This sort of risk-taking was prevalent during the lead-up to the financial crisis and in the subprime mortgage securitization market. The bankruptcy of Lehman Brothers served as both a reminder that the risk could come home to roost after all, as well as a cautionary tale for financial firms and governments in the future to continue to try to mitigate this exposure.
  • Wall Street Crash of 2008 – This is the real-time video from CNBC on the evening of September 14, 2008 which reports the unfolding story that Lehman Brothers was going to collapse and file for Chapter 11 bankruptcy protection the next day (followed by a bankruptcy filing the day after that).
  • Did Lehman Brothers Cause the Financial Crisis & Stock Market Crash on Wall Street? – This interview between Maria Bartiromo and Yves Smith analyses the effects of the Lehman Brothers bankruptcy to ask whether the firm’s collapse contributed to the causes of the global financial crisis or simply signalled the beginning of a trend.
  • Five Years After Lehman Brothers – This discussion on The Agenda with Steve Paikin from 2013 looks into what has changed, or not, in the global economy and financial services sector since Lehman Brothers went bankrupt in 2008 and the markets and industry began their prolonged collapse.

 

The story of the rapid decline and fall of Lehman Brothers, and the collapse of the global economy and markets that followed, is one that will remain captivating to students of the 2008 financial crisis for years to come. Furthermore, the events of that weekend in September 2008, and their causes and effects, serve as an interesting and important measure against which compliance professionals and decision-makers in the business should judge their assumptions of risk and expectations for liability.

Categories
Best Practices

Essential compliance tips for small businesses

Owners and managers of small businesses often may not recognize the immediate importance or value of implementing a compliance program. Small businesses, especially new ones, are concentrated on surviving financially, refining their market and/or products, and identifying themselves and their leaders in an appealing and sustainable way. With these priorities in sight, compliance may fade to seem to be an optional function, something that can be started up in the future or only when necessary or required. However, establishing a compliance program from the beginning can actually service all those priorities. There are several compliance values and practices which can be easily implemented to get any small business off to the right start.

  • Create a Compliance Manual: Similar to an Employee Handbook, a Compliance Manual is the one-stop reference bible for the policies and procedures necessary for running daily operations of the business. These can be concrete, such as policies governing equipment use, information systems, or reporting of workplace injuries, or conceptual, such as Code of Ethics, gifts and entertainment guidelines, or anti-harassment policy. The policies should be tailored to the needs of the business. Don’t be intimidated; they can be simple as well as being a work-in-progress. Contemplating what rules are needed to cover a business’s practices can help to define what those are as well as provide the fundamental structure that can always be scaled up in the future.
  • Raise compliance awareness among employees: Employee training is critical for fostering a culture of compliance. This is true even if the business is a sole proprietorship with only the employee-owner to educate. All organizations are impacted by local, state, and/or federal regulations in at least some area of their operations, and all businesses would benefit from a strong perspective on ethics and integrity. Compliance awareness doesn’t require a comprehensive or expensive suite of training materials. It can be as simple as discussing dilemmas about conflicts of interest, learning about and checking for updates from the regulator of the business’s industry, or keeping an eye out on developments with competitors, peers, and stakeholders that may indicate changing legal or risk landscapes or shifts in the market to anticipate.
  • Reward ethical behaviour and compliance adherence: Employee integrity and individual contributions to a culture of compliance should be considered basic factors in evaluating performance across the organization. Indicate to employees in all roles that their conduct matters and is a measurable part of their performance. This is the most powerful, direct way to set a tone that employee culture rewards and recognizes doing the right thing consistently and identifying with strong values that reinforce that as a priority.
  • Consider sustainability in the pursuit of profits: Small businesses are reasonably driven by the intention to make the money they need to earn in order to survive and eventually grow. However, the ends do not have to justify the means – the means by which business is done will be what defines the image of the company. A poor reputation or a business model that does not build relationships will be bad advertising for the business and emphasize short-term survival over long-term success. Clients and products should be chosen with a clear vision as to how they can scale and grow and what identity or purpose they serve now and in the future.
  • Assess risk: Get in the habit from the beginning of thinking strategically about risk. In concert with sustainability, having an accurate and reliable identification and assessment of the risks to the business will help to direct growth and act responsibly on ambitions. Challenging business procedures to brainstorm about risks and consider whether they are being protected against adequately can be straight-forward yet packs a big impact in business planning.

Encouraging sustainable business practices, reasonable risk tolerance, employee integrity, and organizational ethics are all accessible and easy to implement business values. A corporate culture that promotes these genuinely and early in its foundations is well-prepared for business success.

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This week preview

This week on Compliance Culture

Be sure to visit Compliance Culture this week for posts on these topics.

  • Monday: Essential compliance tips for small businesses
  • Tuesday: The 2008 collapse of Lehman Brothers
  • Wednesday: Miki Agrawal and the corporate culture at THINX
  • Thursday: Compliance issues in food technology
  • Friday: Insights from lectures on dishonesty and mistrust

Don’t miss it!

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Last week round-up

Last week on Compliance Culture

Check out last week’s posts on Compliance Culture, in case you missed or want to revisit them.

Many thanks for reading!

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Compliance in popular culture

Selected lectures on honesty and trust

Honesty in life is the foundation for integrity in business. People with a strong personal sense of correctness will be loath to discard their internal moral register easily just because they are in the workplace. Those who respect the truth, however challenging standing by that may become, and wish to be rewarded for it with being seen as trustworthy, are responsible stewards for organizational and individual values. The impact of a corporate culture that venerates honesty and trust is far-reaching into decision-making, business strategy, sustainability, and co-working.

  • The Growing Inequality of Trust (Richard Edelman) – One of the great challenges to establishing and maintaining trust in society today is the “trust disparity” – the difference between the portion of the public that is credibly informed and the population in general. This is a growing and far-reaching challenge to giving and getting trust, when people cannot agree on a view of the facts or are so predisposed toward mistrust. The contextual motivation for good corporate citizens to model integrity and impact societal change for the good is very strong, especially as trust is on the decline. CEOs and other business leaders should answer this call and leverage their honesty and unwavering commitment to tell the truth and disclaim misleading or false information.

 

  • What’s trust got to do with it? (David Horsager) – Lacking credibility will cost you. Trusted leaders and organizations are more successful, agile, and prepared for long-term survival. Establishing trust be the best motivation and the most effective marketing. The positive impact on business and life of trust should be underestimated. Trusting someone is a choice with benefits and consequences, and supporting trustworthy people to succeed can make a real change in our communities and organizations.

 

  • The behaviour of trust in the workplace (Jacqueline Oliveira) – Intercultural communication is one of the great challenges of the modern workplace. Global teams and international leaders have to reach across the norms of their home culture to find a way to relate to each other that can be understood by everyone but still meaningful and productive. Trust is a universal value which can create that connection for everyone to build upon.

 

  • Whom Can We Trust? (Richard Edelman, David Leonhardt, Tom Wilson) – Public perceptions of trust are on a sustained decline all over the world. What can individuals and their organizations do about it? Are we just doomed to a faithless future? If we can’t trust any of our institutions, how can we trust the people who work at them or, eventually, each other? The potential for moral decline in our private lives is precipitated by the deteriorating credibility of the organizations that dominate our news and the public attention. Personal leadership that is values-based and emphasizes the truth and trustworthiness over all other character traits is one possible path forward. If society starts to reward and appreciate people for their honesty and their eagerness to earn trust, then the public measures of success and expectations on businesses will follow in kind.

 

  • The Value of Trust (Dan Ariely) – How does trust impact decision-making and individuals’ perceptions of their own interests? The value is likely significant, especially insofar as many decisions are made and promises are kept or broken for practical, emotional, or even irrational reasons. Trust in themselves as well as in others does more to determine how people actually behave than their intentions.

 

Check back next week for the follow-up to this collection: selected lectures on dishonesty and mistrust.

Categories
Trends in business compliance

Round-up on compliance issues in cryptocurrencies

Cryptocurrencies are secure, usually anonymous digital forms of money. Cryptocurrencies use blockchain, a decentralized technology linked to a public record of all transactions in the currency, to make payments and store money without attaching their identities to the cryptocurrency or needing to use a bank. The first and perhaps best known of these is Bitcoin, created almost ten years ago, but there are now as many as 1,000 cryptocurrencies available and more being added every day.

A payment method that was created to be secretive and operate outside of the banking system, and therefore outside of all its regulatory and legal controls as well, carries obvious associations of being used in facilitating illegal activities. Furthermore, as trading of cryptocurrencies evolves as an investment practice, heightened volatility and uncertainty in the still-emerging markets bring greater risks.

  • As speculation of a possible boom in the cryptocurrencies market grows, it is important to take cryptocurrencies seriously as businesses, and take from lessons that established technology companies have demonstrated – consider fundamental controls for the entities involved in cryptocurrencies, as paradoxical as that may seem for forms of money that are designed to exist outside of structured systems, but will certainly be vulnerable to the same organizational and individual abuses and vulnerabilities as those systems:  Cryptocurrency skeptics warn of another dot-com bubble, but remember: That’s where Amazon and Google started
  • The influence of artificial intelligence trading and trading/chat bots in traditional markets has already been disruptive and complicated. Now they’re appearing in cryptocurrency markets as well. These applications offer additional tools and advantages, but bring the possibility of eroding market expertise and increasing risks of errors and anomalies:  The Role of Trading Bots in the Cryptocurrency Market
  • What is the difference between a user, an owner, and a customer? All of these somewhat philosophical questions have very concrete foundations in regulation and law that may apply depending on the role of an individual in a transaction. As the cryptocurrency community continues to develop and inevitably professionalize, legal challenges that move these companies closer to the traditional banking organizations they aimed to make obsolete are certain to materialize:  Bitcoin Cash Soars to $700, Coinbase Customers Threaten to Sue
  • As cryptocurrency companies continue to grow in complexity and reach, competency and credibility will become very important, perhaps even competitive advantage for the prepared and professional cryptocurrency over the uncertain and ad hoc one. With “forks” on trading platforms affecting bitcoin holdings like splits would stocks, traders need consistent policy to set precedent and guidelines. Cryptocurrencies want to be free of negative controls that traditional banking systems impose, but fairness and transparency should not be the baby thrown out with the bathwater. Perhaps bitcoin exchanges, faced with conflicts of judgment among themselves, will be desperately seeking a self-regulatory organization before long:  Bitcoin Exchange Had Too Many Bitcoins
  • Cryptocurrencies may have an identity crisis ahead, as attempts to normalize mainstream uses and pave the way for this digital money to be seen as ordinary money are complicated by its continued connection to illicit activity. This time, it’s invoking the spectre of terrorist financing:  Controversial US Sanctions Bill Calls for Cryptocurrency Research

People will certainly continue to turn to cryptocurrencies both as payment methods and as investment opportunities. As this increases, risks for the organizations providing the technology and access in order to transfer, store, and trade cryptocurrencies will also grow. At the same time, users of cryptocurrencies can be seen as consumers deserving of protections, as well as possibly proxies for clients in the decentralised system, subject to some due diligence and markets governance.

Compliance in the cryptocurrencies markets can be a positive influence to ensure the fairness of markets and protect consumers. How to take an uncontrolled market and regulate it smartly, and appropriately for its spirit, without straying into bad or unnecessary regulation which will be the prevailing argument against the proposition for a culture of compliance, is the challenge ahead.

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Compliance and ethics business case studies

Wells Fargo’s culture of non-compliance

Wells Fargo is embroiled in an ongoing crisis regarding fraudulent business practices in many areas of its banking enterprise. The scandal continues to unfold and touch different areas of Wells Fargo’s operations, from unwanted credit card accounts to unauthorized auto insurance products to excessive fees for merchant banking.

So far the only tangible outcome of congressional investigations, endless scrutiny by the press, and a supervisory board shake-up has been continued discovery of further misleading and dishonest conduct at the expense of the bank’s customers. It remains to be seen whether Wells Fargo can rehabilitate itself and regain the trust of the public and its many stakeholders in government and the financial services industry.

Clearly, however, such a pervasive fraud as this one indicates that Wells Fargo is afflicted with a culture of non-compliance. Rather than valuing ethical and sustainable approaches to commercial interests and putting duty of care to the client first, Wells Fargo chased profits via volume and local management encouraged unethical decision-making to enable bankers to pad the bottom line for themselves and the bank.

This conduct appears to have been only worsened by the financial crisis of 2008, when employees drove themselves to hit increasing sales quotas by engaging in gaming, which is opening accounts only to close them shortly thereafter and then open new accounts. Unethical practices, such as these unauthorized account openings and use of false identifications on accounts, at local branches were openly known as business as usual during this period. Wells Fargo appears to have incentivized this conduct in order to meet financial goals during a complicated, depressed market. Employees questioned the practices but ultimately acquiesced because jobs were hard to come by in the business and the income was precious.

A deeper look into Wells Fargo’s corporate culture in these years reveals a cutthroat, competitive environment where sales principles were constantly reinforced and valued over all others. Demands for profits and achievements in opening new accounts and selling products to generate fees were never tempered by encouragement to remember that treating the customer with honesty and respect was the most important business principle of all. Branch managers allowed and encouraged fraudulent conduct by their employees in order to meet regional and head office standards and appear successful. In this culture, worsened by the overall pressure of the Great Recession in general and the financial services industry specifically, good people did many bad things.

The only choice for Wells Fargo going forward in order to restore their credibility is to cultivate a bank-wide culture of compliance. Employee awareness of integrity, fiduciary duties, and obligations to ethical and honest decision-making must be instilled and reinforced regularly. Management, both locally and at the top, must set a rigorous tone of devotion to compliance practices. Sales quota directives should always be accompanied by moral warnings and should be set at a level where cheating is not the inevitable method for success. Sustainability of business practices, over time, should be expressed as the way to make money and service clients: quality, not quantity. Single-minded competitive pressure may be inherent to the sales business, but this needs to be tempered by having compliance and ethics as a core goal and performance metric.

For a more detailed look into the conduct causes behind Wells Fargo’s financial fraud scandals, read Bethany McLean’s story for Vanity Fair.

Categories
Compliance in current and historical events

Martin Shkreli and unethical leadership

“Pharma bro,” financier, and entrepreneur Martin Shkreli is as well-known for his controversial antics on social media and in the press as he is as a biotech CEO. Shkreli gained public attention in 2014 and 2015 for acquiring the rights to market drugs and then hugely raising prices, first at Retrophin with Thiola and next at Turing Pharmaceuticals with Daraprim. In August 2017, Shkreli was found guilty on two counts of securities fraud and one count of conspiracy to commit securities fraud by a jury in New York after standing trial where he was accused of defrauding investors in a Ponzi scheme.

Shkreli gains and sustains attention by modelling reprehensible conduct and immature, immoral behavior. His entire persona is calculated to shock and outrage, promoting a confident attitude in the face of ethical and even legal wrongdoing. The prominence of such a flamboyantly, defiantly negative character presents an affront to the conventions of compliance and ethics in business.

  • Shkreli is far from alone in his controversial and ethically questionable pricing and business practices, though his attention-seeking behaviour and criminal prosecution has kept him in the spotlight. He’s also joining other corporate wrongdoers in his business at exploiting opportunities for profit typical in the pharmaceutical industry, despite their effects later on consumers:  Newly Convicted ‘Pharma Bro’ Martin Shkreli Shined a Light on Pharma’s Biggest Scandals
  • And, despite Shkreli’s preciousness and loud belief that he is a genius, he can also be seen as just another fraudster in a long American tradition of trusting bad people because of a cultural eagerness for innovation and disruption:  There Is Nothing New Under the Sun, Martin Shkreli Edition
  • Emotional intelligence is a popular term in management theory, borrowing ideas from psychology to suggest that leaders who understand their own emotions and those of others, and sensitively incorporate this information into their decision-making and leadership style, are more capable. Typically this is used to inspire positive behaviour like better communications or more sustainable business strategy. Shkreli is a defiant example of the opposite effect, claiming brilliance yet totally disregarding emotional interdependence and the greater good of society. In his mold, ethical behavior and integrity have no relevance to his sense of personal victory:  The Emotional Intelligence of ‘Pharma Bro’ Martin Shkreli
  • Time will tell what the sentencing outcome will be for Shkreli’s recent criminal convictions (many legal commentators think he will receive limited jail time, Shkreli’s defense team has suggested he may serve none at all), but a guilty verdict which would subdue some people has made this famous misbehaver even more boastful:  Martin Shkreli’s lawyers fail to corral bragging ‘pharma bro’ ahead of sentencing
  • Can Shkreli’s legal team convince him that his “people skills” need to be improved to keep him out of prison in the future? Seems unlikely, as his reputation of being bold, odd, and obnoxious gets him attention and keeps him relevant, which seemed to have been appealing to the investors he defrauded, some of whom made money anyway because of side agreements with him. Clearly he sees himself as another peculiar but brilliant business visionary, pointing out the danger in the cult of personality around difficult and immoral leaders who mistreat their employees and partners and use eccentricity as a pretense for selfish, unethical behavior:  Martin Shkreli’s Lawyer: ‘Pharma Bro’ Has an Image Problem

Even through his criminal prosecution, Shkreli seeks and thrives off the attention he gets for acting out in poor taste. He uses moral relativism and the “everyone else is doing it” defense for his unethical and fraudulent behavior, and the profits he gains for himself as the justification.   His financial success should not be admired or enabled by any organization wishing to sustain a business while contributing to a more transparent and responsible society for the future.

Corporate cultures must not reward this type of person with commercial partnerships or philosophical support; while they may make profits, they do so through scheming to deceive and defraud. People like Shkreli are the true rare bad apples that narrow the ethical framework and make the right choices problematic for the otherwise good people they influence.

Categories
Administrative

Happy Labor Day!

Happy Labor Day from Compliance Culture!

In honor of the holiday, check out this article from Forbes on the developing treatment of the Fiduciary Rule at the Department of Labor:  The DOL Rule – It Was The Best Of Times, It Was The Worst Of Times.