Compliance & Ethics November/December 2013 Professional a publication of the society of corporate compliance and ethics www.corporatecompliance.org Compliance as a significant strategic function in the investment community an interview with Erica Salmon Byrne and Jean-Marc Levy Executive Vice President, Compliance & Governance Solutions at NYSE Governance Services Head of Global Issuer Services at NYSE Euronext See page 14 25 31 37 45 How to build a compliance and ethics program by applying ISO-like practices New European law will change everything you do with data Social media: Establishing and enforcing a social media policy The deep-fried compliance lessons from the fall of Paula Deen Todd Tilk Kristy Grant-Hart Stephen Marsh Theodore Banks This article, published in Compliance & Ethics Professional, appears here with permission from the Society of Corporate Compliance & Ethics. Call SCCE at +1 952 933 4977 or 888 277 4977 with reprint requests. FEATURE by Theodore Banks The deep-fried compliance lessons from the fall of Paula Deen »» Bad management leads to compliance problems. »» Fast growth often leads to compliance problems. »» Even without legal liability, reputational injury can destroy a company. »» A strong leader needs strong ethical standards. »» Nothing remains a secret. Banks basic compliance indicators, you risk destroying your business. Reputational damage According to Bloomberg Business Week,2 Paula Deen’s empire started with a restaurant and then a cookbook, but really grew in a big way after the September 2001 World Trade Center attack, when an agent convinced the Food Network that America needed comforting, and a show based on comfort foods would fit the bill. And that brings us to compliance lesson number one. Beware of fast growth and bad management Once she got rolling, Deen found that she could apply her name to a number of different ventures in which she was not actually involved, other than to license her name and perhaps appear in a commercial promoting the product. Careful controls were not placed on each new use of her name. Basic management principles would suggest control of how the name was used in order that its value not be diluted by association with companies or things that might be damaging. +1 952 933 4977 or 888 277 4977 www.corporatecompliance.org Compliance & Ethics Professional November/December 2013 T he media has breathlessly reported on the troubles faced by Paula Deen. After she admitted during a deposition to having used the “n word” in the past, the corporate reaction was swift, including cancellation of her television program and the loss of various corporate endorsements. But her corporate partners—and to a certain extent, her public—ignored two much more important factors: She apparently was a poor manager, and among her management mistakes was the failure to have any sort of compliance program. There are lots of lessons in this sorry tale for compliance officers. A lawsuit with many scandalous allegations1 triggered a wave of adverse publicity that did significant damage, even though part of the case was dismissed and the entire case was ultimately settled. Whether or not the allegations are all true, the litigation process uncovered a lot of issues, all or most of which could have been avoided had there been a compliance program in place. Although Deen’s situation has many unique aspects, the lessons for all businesses are clear: If you fail to pay attention to 45 FEATURE Basic legal principles require quality control by the trademark licensor to ensure that this representation to the public is correct. A trademark is supposed to indicate the “source” of goods, and as a marketing principle, this is a way to gain value for a product whose innate qualities are otherwise unknown to a potential customer. Deen has an interest in monitoring the quality of any item or service that bears her name. One might wonder at the connection of Deen to the key chains, lobster pots, and mattresses the bore her name. But apart from the dilution to the Paul Deen trademark and reputation, is the general principle that what might work in a small business won’t work in a larger one. A company founder might be able to manage a business out of her kitchen, but as a business grows larger, more employees are needed. They need standards by which to operate, and good business management includes not just the mechanics of running a business (e.g., proper payroll accounting), but also legal and ethical compliance. The larger the company gets, the more complex the business, which requires more careful management. It also makes the company a bigger target, and the subject of more scrutiny. So the ability to slide “under the radar,” if it ever did exist, is there no longer. And if a growing company is a consumer-facing company, it needs to understand that it will be judged by perceptions and reputation. Allegations may be as damaging as findings of fault, and the threats to a company’s reputation must be managed just as every other aspect of the business is managed—or mismanaged. Reputation loss: Gradual, cascading, and cataclysmic The recipes from Paula Deen were known for their use of fats and sugars. Undoubtedly, they tasted good, but were probably not anyone’s idea of nutritionally-balanced foods. Somehow, her charm and America’s nostalgic desire for the comforts of an earlier age convinced a lot of people that it was OK to make butter the key ingredient in their diet. She gave us permission to indulge—until she didn’t. It turned out that Paula Deen’s body could not absorb endless rounds of sugar-laden food, and, like many people, she developed Type 2 (adult-onset) diabetes. She apparently kept this information to herself for several years, until an endorsement of a diabetes drug was announced. This may have created a moment of cognitive dissonance to her fans, and perhaps it did start the process of eroding her image. But even if she started using a diabetes drug herself, did she consider that the opportunity to earn an endorsement fee might cause damage to her credibility that was far greater in value? A company involved in consumer products must always be concerned about reputational injury, because a consumer/ customer who becomes unhappy with the “feel” of a company will turn elsewhere. This may or may not have anything to do with the actual product, but if someone does not like some aspect of the company (e.g., “I heard that you use slave labor to make this t-shirt.”) they will turn elsewhere. A company that has a business-to-business operation may be Compliance & Ethics Professional November/December 2013 A company involved in consumer products must always be concerned about reputational injury, because a consumer/ customer who becomes unhappy with the “feel” of a company will turn elsewhere. 46 www.corporatecompliance.org +1 952 933 4977 or 888 277 4977 FEATURE Deen apparently told the truth about having used the n-word in the past did her no good. In the context of everything that was being revealed, the media seized upon this admission and Deen’s corporate sponsors started terminating their relationship. Allegations were made that Bubba drank bourbon, looked at porn, and embezzled money from the restaurant—all of which should have had no bearing on anything that Paula Deen was doing, except that she was connected to the restaurant. And all of these allegations made great fodder for the tabloids. And to complicate matters even more, Deen was subject to an attempt to extort $200,000 based on a threat to reveal even more embarrassing information.3 Are you aware of the warning signs? Most compliance problems do not happen overnight. There is usually a signal that something is amiss, and often a chance to make corrections. Deen was warned that her brother’s management skills were deficient, but she ignored the suggestion that he be removed from the business. Was she aware of the detailed allegations about his conduct? That is unclear, but when Jackson’s attorneys sent the demand letter, that should have been a wakeup call to see what was going on. In many areas of compliance, the goal of the company is to prove that it is committed to doing the right thing, and any misconduct was due to the misbehavior of an unauthorized employee. This is the philosophy of the Federal Sentencing Guidelines (FSG), which outline the recommended steps to create an “effective” compliance program. Government enforcers will potentially give credit, even if the compliance program does not completely prevent all misconduct. One aspect of the FSG is that a company responds to wrongdoing by correcting gaps in its program to prevent recurrence. +1 952 933 4977 or 888 277 4977 www.corporatecompliance.org Compliance & Ethics Professional November/December 2013 somewhat less concerned with non–productrelated reputational risk, but even there, the perceptions of business partners can make a big difference about who gets a request for proposal (RFP). Deen opened a seafood restaurant in Savannah, Uncle Bubba’s Oyster House, for her brother, Bubba Hiers. Although her name was not on the sign when people came in the door, she was the 51% owner of the restaurant and visibly attached to it. A book of recipes from the restaurant, “Uncle Bubba’s Savannah Seafood,” was promoted as containing recipes from the family kitchen of “Paula Deen’s baby brother,” and prominently featured her name on the cover. But her actual involvement in the restaurant remains unclear. The facts (or at least the allegations) about how Paula Deen conducted her business came to the public’s attention as part of a sexual harassment lawsuit filed by the general manager of the restaurant, Lisa Jackson. Jackson’s lawyers at first threatened to file a lawsuit based on the hostile work environment that Jackson encountered, and if Deen did not agree to settle the case out of court, the lawyers would file suit and seek maximum publicity of the “racist and sexist culture of her corporate and personal life” that would damage the value of Deen’s brand. The lawsuit was filed and depositions began. In the course of discovery, it was revealed that professional managers had recommended that Bubba be removed from management of the restaurant. Deen apparently ignored the advice. As more of the allegations from the lawsuit were revealed, the press dug deeper into the case. The media pounced on the more titillating excerpts, like reference to the n-word used by Deen or her desire to have a “Southern style plantation wedding” with black waiters dressed in period garb (in other words, during the era of slavery). The fact that 47 FEATURE Compliance & Ethics Professional November/December 2013 “La compagnie, c’est moi.” Many companies are driven by the personality power of the founder or a CEO. Wall Street tends to idolize the strong CEO, and the media loves to tell stories about how the CEO’s strategic insight has driven the company to new successes. While a company is doing well, they tend to overlook the more distasteful aspects of the CEO’s behavior, such as demanding excessive salaries and benefits, or having a moral blind spot when it comes to legal compliance and ethical business behavior. The CEO may have a vision for the company, but unfortunately, it is often accompanied by an overbearing attitude that prevents others from speaking up. Instead of executing a strategic vision within a framework of corporate policies and procedures (including compliance policies), the CEO’s power is turned into a substitute for any sort of internal management structure. Success and media adulation convinces a CEO that she is all-wise, and her decisions are not to be challenged. To a certain extent, this pattern was followed by Martha Stewart and Steve Jobs. Stewart engaged in insider trading and obstruction of justice, and served some time in jail. She has been able to resurrect much of her business, but her legal problems seemed to start with an attitude that the rules didn’t apply to her. The Steve Jobs biography revealed that his singular focus on what he thought was right for his company meant that he paid no attention to outside rules, like the requirement that his car have a license. His failure to recognize that outside medical advisors might know how to treat his illness may have contributed to his untimely death. And it appears that pressure from Jobs on how he wanted to sell e-books when the iPad was released was behind the recent court decision that Apple engaged in price-fixing. 48 www.corporatecompliance.org +1 952 933 4977 or 888 277 4977 So we find in Deen’s company an unwillingness (or inability) by other employees to challenge decisions. When she was advised that her brother was not a good manager, she ignored the advice. In her world, it was apparently acceptable for family to come first, even at the risk of damaging the company. Good CEOs want good advisers, but in the case of the all-powerful CEO who goes his/her own way, the unwillingness to take advice indicates a lack of management skills and (probably) a gap in ethical values. Selling the company image Paula Deen’s business was built on an image: Friendly people providing comforting food that was really OK to eat, even when everyone else had told you it wasn’t. She apparently failed to realize that while she might still survive, her image could be destroyed by the revelations of a lawsuit or by conduct that was inconsistent with the message she was trying to sell. People might get uncomfortable with very indulgent food products when she disclosed that she had diabetes. Companies that sell any sort of product or service need to realize that their business depends on what their customers think of them. If confidence is lost, the business will go with it. And this is not always related to the substance of a problem, only the perception. If the CEO is banking on a personal image for the value of the company, that value can be destroyed by conduct that makes people uncomfortable, such as the allegations of both sexual harassment and racial discrimination. Part of this seems to have reflected a certain amount of cultural blindness. If a company wants to move from being a regional to a national or international company, it needs to be aware of what messages it is sending to customers everywhere. And the conduct and statements of the CEO of a personality-driven company do not get separated from the company itself. FEATURE Of course, owners of private companies are free to do as they please. But if they choose to destroy the value of the company, they are not only hurting themselves, they are hurting employees, suppliers, and customers who depend on the company. The keeper of the image of a personality-driven company needs to remember that he/she has a large responsibility to behave ethically, because a failure of compliance will both threaten legal liability and possibly cause unrecoverable damage to the company’s image. Publicly held corporations may be more sensitive to their image, because it may have an impact on their stock price. Privately held companies often assume that they can skate “under the radar” and this is a serious mistake. A common lesson in records management training in corporations is “Write your email as if it were going to appear in the New York Times.” That message is intended to bring home the need to create business communications in a business-like way. But now the aphorism might well be amended to read “Always communicate with the assumption that what you say will become public.” Whether it is due to whistleblowers (and their incentives), poor computer security, sloppy email addressing, or careless use of Facebook, the chances of “covering up” some type of corporate malfeasance are much less. Sloppy or offensive communication, even if never intended for a public audience, can make it look like something was wrong when really there was no compliance violation. And those communications, whether accurate or inaccurate, are attributed to the corporate employer, whether they represent the position of the company or not. The message Compliance officers should look at reports of problems of other companies not merely with relief that it did not happen to them, and certainly not with a feeling of Schadenfreude when a competitor gets in trouble, but with a focus on how to use the problems of others to help their own compliance program. Many compliance officers report the common scenario that it is difficult to get management to pay attention to compliance if there have not been serious problems in recent memory. When there is a compliance disaster, companies (i.e., their management) suddenly “get religion” and invest in elaborate compliance programs. To avoid this complacency where there hasn’t been a near-death experience, every report of problems should be examined for its educational value. The problems +1 952 933 4977 or 888 277 4977 www.corporatecompliance.org Compliance & Ethics Professional November/December 2013 Nothing remains a secret Publicly held corporations may be more sensitive to their image, because it may have an impact on their stock price. Privately held companies often assume that they can skate “under the radar” and this is a serious mistake. Bad news, whether in the form of disclosure of substantive violations or just salacious stories, will get out. Whether it is a business customer deciding to choose an alternate supplier, a consumer picking a competitor’s product, a private plaintiff learning of injury, or a prosecutor being alerted to a possible criminal violation, the lack of an effective compliance program can cause a multitude of business and legal problems. 49 FEATURE of others give you a head start on examining your own company to see if the same thing could happen to you. And part of the process is using the tales of woe of others as a teaching moment for management. When a report has been widely publicized, it also provides a chance to educate employees about what they should and should not do, and what the company stands for. Compliance & Ethics Professional November/December 2013 Summary The best teaching moments come from the problems of companies in the same industry, but any time there is a wide report of compliance-related problems, you should think about what it means to your company. Paula Deen’s problems provide the following lessons: ·· If there is a report of a possible legal problem, it should be investigated thoroughly and promptly. Even if an allegation is found to be without merit, the prompt investigation will avoid accusations that the company didn’t care. It will also enable the company to stop a problem before it gets worse. ·· Management sometimes needs to make tough decisions that mean putting protecting the company ahead of protecting a friend or relative. The company should follow an objective standard of ethics and compliance, regardless of the individuals involved. ·· Poor management of ethical issues often mirrors poor management of business issues. ·· Companies that are dominated by one CEO and have little or no checks and balances run the risk of compliance disasters if the CEO has blind spots about management or personnel issues. Every CEO needs people to keep him/her in check, including a strong, independent, compliance function to objectively manage ethical issues. 50 www.corporatecompliance.org +1 952 933 4977 or 888 277 4977 ·· Employees must be reminded explicitly of what the company stands for. Employees will model their behavior on what they see management doing, and if they see improper behavior by management, they will assume that it is OK for them to behave that way as well. ·· Companies depend on their customers, and the customers’ perceptions are as important as the substance of legal compliance. In the Internet Age, nothing remains a secret. Companies should not assume that an acquittal or winning a lawsuit will be understood by customers. Although there is no way to prevent all false accusations from being aired, a strong ethics and compliance program will limit the chances that such reports will get into the media and leave customers with a negative image of the company. ·· All companies, to a certain extent, are built on reputation or image. Sometimes this may be the main asset of the company when the actual product to which an image is attached is very fungible and numerous substitutes are available. For companies like this, actions (or inactions) that damage a company’s image will basically destroy the company, and a compliance program becomes even more important. It is the equivalent of the quality control program on a production line, because it is designed to ensure that that the quality of the company’s product is maintained. Theodore Banks ([email protected]) is Partner with Scharf Banks Marmor LLC, and President, Compliance & Competition Consultants, LLC in Chicago. 1. Jackson v. Deen, No. 4:12-cv-00139 (S.D. Ga.). Complaint filed May 17, 2012, racial discrimination allegations dismissed Aug, 12, 2013, remainder of case dismissed Aug. 26, 2013. 2.A. Woolner, F. Gillette: “For Paula Deen, Management Mess Leads to Career Meltdown.” Bloomberg Business Week, (July 3, 2013. Available at http://buswk.co/18myqkv. 3.Russ Bynum: “Paula Deen Extortion Case: Man Charged Scheduled to Change Plea.” Associated Press, August, 9, 2013. Thomas Paculis apparently contacted Deen’s lawyers shortly after he read about the Deen deposition. He was caught in an FBI sting, and pled guilty on August 9, 2013.
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