Tag: culture of compliance

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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.

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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.

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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.

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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.

 

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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: Happy Labor Day!
  • Tuesday: Martin Shkreli, unethical CEO role model
  • Wednesday: Non-compliance at Wells Fargo
  • Thursday: Compliance developments with cryptocurrencies
  • Friday: Insights from lectures on honesty and trust

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 documentaries on the 2008 global financial crisis

The Great Recession, which began in 2007-2008 with the collapse of the subprime mortgage market and led to an international banking crisis, offers many lessons for compliance practitioners and enthusiasts alike. Many documentaries have been produced in the ensuing years to offer new insights on the crisis and its causes.

  • American Casino and the origins of the subprime collapse – The filmmakers of American Casino started their work in 2008 with a theory that the housing market was in trouble. Over the year that they filmed, this idea took root in reality and unfolded before them. The 2009 documentary that resulted offers a vivid explanation of how the subprime mortgage market evolved and then fell apart. The stories of average Americans who held the mortgages that were underlying the bonds created by big investment firms humanize the origins of the crisis and help to ground the actions in the financial markets by connecting them to the many people that were affected.

  • Inside Job and non-disclosure of conflicts of interest – This 2010 documentary reaches back into the international origins of the financial crisis, to begin with an look at the collapse of the Icelandic banking system. One of the movie’s principal assertions is that academics and scholars who are professors at many of the prominent educational institutions have conflicts of interest due to their financial ties to firms such as Goldman Sachs and other large market makers. The film’s argument suggests that these conflicts of interest are not subject to mandatory disclosure and so the economists express opinions about investments and financial systems which cannot be transparently evaluated.

  • Capitalism: A Love Story and the dangers of deregulatory trends – Michael Moore’s 2009 documentary takes a wide view on general contemporary economic conditions in the United States, ethically questionable practices of major corporations, and the status of the American worker in modern capitalism. Germane to the subject of the 2008 global financial crisis, Moore takes a look at the lending practices of Countrywide, one of the main players in the subprime lending practices that led to the market collapse and ensuing crisis. Countrywide operated in an generation of regulatory relaxation, leading to unduly risky practices of giving loans to people who could not reasonably afford them as well as giving discounts and special deals to politicians and regulators in hopes of keeping the good times rolling.

  • The Flaw and the evolving state of modern American capitalism – A good companion movie to Capitalism: A Love Story, this 2011 documentary focuses on explaining how the consumer society in the United States has a symbiotic relationship with the markets, at the expense of the American citizen whose main value in society becomes determined by spending power.   In this dynamic, the rich get richer while the poor stay poor and the middle class drifts ever downward, with interventions such as the easier extension of lending in the pre-2008 years only seem to present a possibility for upward mobility for them, but rather just create financial crises where they bear the brunt of the losses.

  • Money for Nothing: Inside the Federal Reserve and the cyclicality of major financial crises – The ebb and flow of regulatory pressures in the United States are enabled by the lack of understanding most Americans have about what the Federal Reserve System is and how its policies impact the economy and the markets. This 2013 documentary suggests that these policies had a major role in the 2008 financial crisis and will continue to contribute to the creation of bubbles that culminate in future crises. The firm suggests that awareness of the public and citizens’ engagement in activism for more accountability and greater transparency by the Federal Reserve System are critical for protecting society from ever-greater financial crisis in the future.

These are just a few examples of documentaries which can provide an informative and compelling view into the events of the 2008 global financial crisis. For years to come there will surely be many more such documentaries to add further insights to the historical record on the Great Recession.

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Trends in business compliance

Round-up on emerging compliance disciplines in diverse industries

Compliance programs of the last 20 years have taken the firmest roots in industries that are by definition highly-regulated or in those which have most potential for widespread damage from wrongdoing.  These range from pharmaceutical companies in the former group to financial services firms in the latter group.  Current trends indicate, however, that many other industries’ practices are being assertively investigated by the media, concerned citizens, and filmmakers. These investigations bring to light processes and practices that are governed by insufficient controls and often unethical cultures.

  • Doping in professional sport is under increased public scrutiny in the aftermath of scandals such as state-sponsored cheating by Russian athletes in the Olympics and the dramatic fall from grace of Lance Armstrong, who cheated without detection for years; as society deals with the fallout of these discoveries, far-reaching change in anti-doping programs is necessary:  Icarus: A Doping House of Cards Tumbles Down
  • Evolving tech company organizational culture is under fire again, this time at Google, with an employee-authored document questioning diversity initiatives going viral and suggesting that gender inequality and treatment of people of color remain systemic problems in Silicon Valley that current corporate governance systems are insufficient to address.  The employee in question was dismissed immediately, and Google leadership immediately started disclaiming the statements and apologizing, but it remains to be seen what substantive steps might be taken to actually address the root causes of this conduct and openly analyze the culture of compliance at Google.  Hopefully a self-appraising, progressive conversation can take place in Silicon Valley rather than denial of the systemic issues that lead to these events time after time: Google Employee’s Anti-Diversity Manifesto Goes ‘Internally Viral’ 
  • Cybersecurity grows all the time as a risk factor to businesses, with hackers constantly outpacing efforts to prevent their intrusions; now moving beyond breaking into office e-mail servers or ransoming files from zombie computers, these cyber-thieves are exploiting differences in national laws and vulnerable devices to rig slot machines in casinos around the world:  Meet Alex, the Russian Casino Hacker Who Makes Millions Targeting Slot  
  • Campaign finance laws are a perennial hot issue in US politics; these laws are often intended to avoid corruption and increase transparency, but with the number of committees, groups, and shell companies participating in election fundraising constantly growing, following the money is becoming harder, complicating along with it efforts to establish accountability:  Soft Money Is Back — And Both Parties Are Cashing In
  • Fascinating intersection of business and politics, with all the risks inherent in both, as consumer technology giant Samsung struggles against an increasingly complicated government relationship, intense corporate work culture, legal dramas, and public protests, despite an impressive commercial rebound:  Summer of Samsung: A Corruption Scandal, a Political Firestorm—and a Record Profit

All the foregoing represents many growth areas for the welcome expertise of compliance practitioners and a possibility to drive change toward a society that places a higher value on accountability and integrity.

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Compliance and ethics business case studies

Tinder and the role of compliance in fostering professionalism in start-ups

Tinder is a well-known dating app which matches users based on location and social media profile compatibility. It is infamous for its “swipe” interface where users register their reaction to potential matches by swiping right on the screen to register an interest in connecting or swiping left to dismiss.

Tinder was founded by a group of childhood and university friends, most prominent among them Sean Rad. The spirit during the early days of Tinder is presented as rowdy, social, creative, and disruptive – a start-up with a millennial energy where the fun and approachability embodied in its product was inspired by its corporate identity.

Eventually, however, friendships began to sour, the novelty started to wear off, and controversy began to take seed. One of the co-founders, Whitney Wolfe, fell out with Rad and another co-founder, Justin Mateen and filed a lawsuit alleging discrimination, sexual harassment, and retaliation. Wolfe has gone on to found a competitor dating app, Bumble, in which only women can initiate communicate with their male matches. Gender imbalance, public health, personal security, and data privacy are all major concerns which have been raised against Tinder’s operating model.

In all cases, Tinder has only been able to be reactive to these issues, not to preventively address them. This goes down directly to the fact that Tinder has no native culture of compliance. Tinder has a start-up culture as described above – entrepreneurial, excitable, informal, and innovation-focused. In these dynamic cultures there is a tendency to eschew traditional foundations as staid, too likely to impose restrictions or rules that will stunt growth and prevent transformative achievements. All the focus goes on being fast-moving.

Indeed, the image of the plucky entrepreneur starting a business by maxing out personal credit cards and taking customer calls from the garage at home is an endearing and enduring one. However, when this start-up gets some cash and energy and scales up, often the investment is concentrated on people who will bring the product to market – engineers, designers, marketing and sales staff.   The below the line functions – HR, operations, finance, and indeed compliance – often stay with the principals or outside vendors for as long as possible, to the detriment of the development of compliance values at the core of the organization. This may be practical to achieve profit objectives, but it’s not professional.

A forced culture of compliance will never be a natural one. In the complex business and regulatory environment today, it would be wise to include among the early employees someone who can set the stage for a genuine culture of compliance from the beginning. A company that grows up aware of compliance and ethics obligations and has an authentic, competent champion for employee integrity will not have to try to develop this later on when it may be too late for it to take genuine hold.

For a deeper look into Tinder’s roots and Rad’s growing pains, check out this story by Nellie Bowles for The California Sunday Magazine.