Practical insights for compliance and ethics professionals and commentary on the intersection of compliance and culture.

Insights from management for compliance officers

This is the fourth and final in a series of four posts on insights for compliance officers from different fields of study.  The first post in this series covered lessons from psychology regarding, for example, self-interest and decision-making, from prominent figures such as Sheena Iyengar and Malcolm Gladwell.  The second post was about insights for compliance officers from self-development and coaching, including from people such as Wayne Dyer and Eckhart Tolle.  Last week’s post discussed behavioral economics, focusing on the work of people such as Dan Ariely and Richard Thaler.  Today’s post will suggest ways in which management theory can be applied to corporate compliance programs.

As a practice, compliance is greatly concerned with topics such as governance, controls, leadership, sustainability, business values, organizational integrity, risk controls, institutional decision-making, tone and conduct at the top, and corporate culture.  It shares these general disciplinary themes with management theory, which takes on the broad task of determining and guiding the strategic direction of an organization and steering its employees and resources in furtherance of these goals.  Given that the contributions of a robust compliance program to the regulatory, practical, and cultural aspects of this task are great, compliance officers stand to gain great insight from studying commentary from the field of management theory.


Insights from self-development and coaching for compliance officers

This is the second in a series of four posts on insights for compliance officers from different fields of study.  Last week’s post was about lessons from psychology regarding motivation and choice, from prominent figures such as Abraham Maslow and Sheena Iyengar.  Today’s post will discuss insights from self-development and coaching.  Next Tuesday’s post will be about insights from behavioral economics.  Finally, on March 13, the last post in this series will discuss how business management theories can be useful for compliance officers.

Much like the insights from psychology discussed in last week’s post linked above, theory of self-development and coaching can be very useful for creating and cultivating a culture of compliance at both the individual and organizational levels.  Focusing on thoughtful growth and progress, inner success and ethical achievement, and a values-based, sustainable approach to strategy and mission are all necessary for fostering integrity in organizations and groups or people within them.  Motivational writings on paths to self-development and tips for effective coaching can translate easily to informing a compliance culture.


Insights from psychology for compliance officers

An informed approach to business compliance can be improved by taking theoretical insights from different fields.  For example, a corporate culture which seeks to promote ethical leadership, or provide support for making choices from a basis of integrity, or encourage employee engagement with compliance values, should take lessons from a variety of sources to make relevant and relatable appeals.

Psychology in particular has many affinities with a profession that is focused on culture and values, both of organizations and of the individuals within them.  Study of psychology in search of insights relevant to compliance ethics can be used in creating our culture, informing our norms, and helping us to develop and articulate our values.  All of these insights are necessary for cultivating a compliance culture and professionals in the compliance and ethics function have to be the first ambassadors for this.  To do this effectively, psychology can provide important guidance.


Ethical leadership in the Eagles’ Super Bowl LII victory

When the Eagles beat the Patriots in Super Bowl LII on February 4, 2018, they did much more than win a football championship.  To Eagles fans, the victory represented the culmination of 52 years spent waiting for their team to bring the Vince Lombardi Trophy home to Philadelphia.  Feeling disliked, disrespected, and underestimated by rivals and analysts alike, the Eagles and their fans leaned into their adopted underdog persona, making the ultimate win all the more powerful.

The media attention around the aftermath of the game has focused on the jubilation and vindication, amidst this prior doubt and dismissal, felt by the fans, the players, the coaching staff, and everyone affiliated with the team.  All this was capped off by a joyful parade down Broad Street to commemorate the accomplishment.


Compliance and Stephen R. Covey’s “emotional bank accounts”

Stephen R. Covey’s famed self-development insights can also be applied to compliance and ethics. The acclaimed author of the worldwide best seller The 7 Habits of Highly Effective People has provided motivation to managers, students, and progressive people for many years. Covey’s work was far more than just a self-help guide or a management how-to. With his emphasis on character ethic as well as values and principles, Covey created an interesting body of work that can be broadly used in crafting the business mission statements he endorses so heartily, from a compliance and ethics and perspective.

This post takes an in-depth look at each one of Covey’s 7 Habits to explore the applicability of each one for the work and goals of compliance professionals. All seven of the habits encourage conduct that is positive and productive for compliance risk awareness. Inner success, sustainable and functional interdependence, and strategic, purpose-driven vision are just some examples of the compliance culture qualities that the 7 Habits consistently endorse. Trustworthiness, credibility, and honesty are the cornerstones of individual relationships and organizational identities in Covey’s system.


MiFID II conduct principles and markets integrity

MiFID II – the second Markets in Financial Instruments Directive – became law across the European Union on January 3, 2018.  It’s intended to overhaul the entire supervisory framework for financial sector organizations who are in the EU, have clients in the EU, or wish to have access to or establish equivalency for the markets there.  Its predecessor law, MiFID I, became law in 2004 and was judged to have not stood the test of time in the aftermath of the global financial crisis.  Therefore the seven year drafting process – from 2010 to 2007 – that culminates in MiFID II implementation this year is aimed to set a higher regulatory standard for investment banks, broker-dealers, and other institutional market participants and their employees.

Much of the attention about MiFID II implementation has focused on the burden to organizations from financial costs, human capital and efforts, and changes in commercial strategy that will be required for firms to work toward compliance with the new laws.  The laws are thousands of pages long and touch nearly every area of the financial services markets.  Some of the major areas of focus in MiFID II are investment research, transaction reporting, and brokerage compensation arrangements.  However, the far reach of banking and securities markets activities into the economy means that laws intended to govern this sector have a broad and dramatic scope as well.


Travel safety and regulation

Travel safety is one of the most important objectives of the overall supervisory agenda.  Consumer protection and public safety intersect in this topic.  Keeping travellers away from harm and maintaining safe and orderly routes and equipment should be the top priority of any commercial entity providing transportation to consumers.  At the same time, companies working in the transportation sector look to legal and regulatory requirements to set minimum standards for safety infrastructure and motivate investments in technology and human capital improvements.  Regulatory action, or inaction, can therefore have a huge impact on protective measures and responses to threats to safety taken by companies such as airlines, rail transit operators, and private transportation providers.


Imposters throughout history

Imposters are a fascinating sub-set of fraudsters. Throughout history, individuals who have committed fraud for a variety of reasons – financial gain, social mobility, and even political or corporate espionage – by pretending to be someone they are not. Some of these people are repeat fraudsters, spending much of their lives assuming other identities and committing great amounts of time to working on complex backstories for their false identities, including disguises, accents, and fake community or cultural ties. In order to commit these fraudulent acts, imposters often make deft use of social networks and engineering, by falsely representing themselves in personal or business relationships and then using one misrepresented connection in order to forge subsequent ones.

In this respect, imposter fraud is often the proximate cause of many other types of fraud, creating the trust and credibility that provides access for the faker to commit his or her offenses. Therefore from an ethical culture perspective imposters are quite interesting to study, in order to ponder their motivations or the heuristics and expectations for honesty and evidence that allow their fraudulent efforts to succeed.


Interesting cases of retractions by scientific journals from Retraction Watch

Retraction Watch is a blog that started in 2010 with the objective of publicizing, studying, and contributing to the investigation of retractions in scientific journals of academic research and writing. The validity of academic papers is often held to a vaulted status because of the famed system of vetting through peer review and editorial boards before publication. Identifying mistakes in this context, then, whether through inadvertent technical errors, minor or major, or some intentional misrepresentation or fraudulent conduct, is an interesting and necessary practice in order to uphold academic integrity.


Regulatory and compliance omissions in the Volkswagen emissions scandal

The Volkswagen emissions scandal, also known as “Emissionsgate,” kicked off in 2015 when the US Environmental Protection Agency (EPA) notified the carmaker that it was in violation of the Clean Air Act.  With the altered engine emissions controls, the programming misrepresented nitrogen dioxide output so that it appeared to meet US market standards.  In reality, however, the real performance of the vehicles on the road without the altered programming for the testing environment resulted in output that exceeded the regulatory limit by up to 40 times.  For a basic overview of the Volkswagen emissions scandal as it unfolded since 2015, check out this primer from the BBC:  Volkswagen: The scandal explained.

The altered emissions results were ultimately exposed due to re-testing.  The International Council on Clean Transportation accumulated research from a variety of sources which upon study showed additional emissions in road tests from those recorded in the regulatory testing environment.  Once these non-conforming results were provided to the California Air Resources Board in 2014, they were ultimately escalated to the EPA, resulting in the investigation and enforcement action which led to the Clean Air Act notice of violation.  The investigation conducted by the EPA demonstrated that from 2008 to 2015, Volkswagen had intentionally modified many diesel engines in its vehicles to fraudulently “pass” regulatory testing.

In the aftermath of the EPA notice, Volkswagen was subjected to investigations in various countries.  The fix for the emissions issues to bring them into true compliance with the regulatory standard may cost the company as much as $15 billion or more, with fines so far in the US alone of almost $3 billion and several executives facing personal criminal charges for their role in the fraud.

One of the striking aspects of this particular corporate scandal is that as the corporate misconduct was exposed, it showed that Volkswagen took advantage of the regulatory testing by exploiting design and engineering knowledge in making engine construction choices expressly in order to deceive it.  In many cases of consumer safety or standard violation recalls, the manufacturer merely fails to make required changes or delays doing so, resulting in unsafe conditions or violation of regulatory and legal requirements.  Similarly, defeat devices which “trick” regulatory testing systems (actually codes programmed into the vehicles’ computerized control panels) are nothing new in the automotive industry, as explained in this Ars Technica piece.

In the Volkswagen’s case, however, as explained in this Investor’s Business Daily article, the carmaker made redesign choices to its emissions system that were not practical for business purposes but directly enabled the testing manipulation.  Then, when faced with a need to demonstrate compliance in order to access the market, instead of altering planned performance or gas economy standards, the company opted to game the system with installing defeat devices on the very system it installed knowing it would need to be defeated and would enable doing so.

So why would a company make all of these conscious choices to dupe the system and spend money on deceptive systems instead of making the same amount of effort to establish real compliance and avoid the dishonesty?  At its root is most commonly what was referred to in lawsuits against Volkswagen by several states as a business culture of “corporate arrogance.”  As this NPR article explains in a nutshell, Volskwagen thought it could get away with the fraud because others in the industry did it too and because it was Volkswagen.  The company rigged its vehicles after going to great lengths to determine that it was definitely illegal to do so, against clear legal advice and in light of full knowledge of the consequences, and in a culture of non-compliance which rewarded cheating and did not take responsibility or model appropriate conduct.

Nowhere is this values deficiency in the Volkswagen corporate culture more evident than in the reaction by the CEO, Matthias Mueller, to the public outcry in response to the fraud.  This interview with NPR shows how problematic the tone and conduct at the top was in the public handling of the scandal.  Rather than modelling accountability and transparency, Mueller instead insisted that there were no ethical issues at Volkswagen and that rather the emissions fraud was due to a technical problem in the company’s interpretation of US law.  Mueller repeatedly asserted that the company did not lie or deceive but instead misunderstood US legal requirements, a disingenuous and unconvincing defense for a major global corporation which must contend with a complicated fabric of regulatory and legal frameworks all over the world to meet its duties in doing business.

The gap created by this purported legal misinterpretation could and should have been filled by a values-based approach, where taking corporate social responsibility for environmental impact and making business decisions based upon best collective outcome rather than ease and expediency, with some enablement of future cheating as a side benefit.  Demonstrating integrity is not as simple as apologizing once you get caught, and portraying violations as mistakes is not an example of ethical leadership or sustainable business values.

For more on EPA compliance, check back on Thursday, January 25, for a round-up on current rule-making and enforcement trends at the agency.