Does compliance need more darkside? BY RICHARD BISTRONG Since my release from the Federal Prison Camp in December 2013, I have been observing many different perspectives in the compliance discourse that have broadened my own understanding of compliance. From the fields of law, audit, and investigations (to name a few), comes a stream of well experienced and relevant viewpoints that from my own frontline perspective are essential to those tasked with developing and implementing resilient and sustainable compliance programs. Given the current rising tide of anti-bribery enforcement actions, investigations and upcoming trials, what could be missing from such a robust debate? To answer that question, I refer to Dr. Roger Miles, Behavioral Risk Lead, Thomson Reuters, who stated in a White Paper, Risk Culture and Conduct Control: Time for a More Enlightened Approach: Shouldn t the designers of financial controls spend some time looking at the dark side? Instead of regulating by defining and enforcing some formulated version of normal behavior, a better approach for supervisors seeking to regulate conduct might be to identify the pathologies of bad behavior. What are its warning signs, its leading indicators? Can these be found in financial reports? (Hint: No, they cannot). Where do we need to look? Indeed, bribery is a crime of behaviors, where at some level, the giver and taker have calculated that the benefits of corruption outweigh the risks and consequences of getting caught. As Matteson Ellis states in How to Pay A Bribe (Wrage, 2014), corruption is a crime of opportunity. People pay bribes by exploiting weaknesses. So why not take a dive into ethikos May/June 2015 1
the dark side, and see what well educated and highly compensated employees are thinking when they risk their own liberty (as I did), to engage in corruption, even in what is referred to as petty corruption. But first, does the compliance community really need to hear about dark side behaviors to be effective? I think there are two simple answers: yes and no. Pivoting again to Dr. Miles, who in a recent TR paper, Tracing the True Origins of Bad Behavior, states, every organization functions at two different levels the formal and the informal. The formal organization is the one you see with your normal eyesight, however, it s the informal organization that dictates What Actually Happens (WAH). As I will share, while I am not sure that a dark side understanding might impact the formal structures of compliance from a legal, audit and regulatory perspective (the no answer), I think there is a great opportunity to influence the WAH (the yes ). As I eye my social media feeds, I see a stream of articles that provide a continuous repacking of enforcement actions, discussion about to whom compliance should report, and much about tone from the top, and I wonder, where is the WAH? In other words, while I see much of the compliance debate and discourse as essential to Dr. Miles formal organization, in the realm of anti-bribery compliance, what I don t see is how WAH behaviors are addressed. Thus, perhaps by better understanding the WAH, we can see how those on the front lines calculate and frame the engage in or refrain from bribery decision? With that knowledge, shouldn t compliance have a greater opportunity to calibrate compliance training and prevention programs to the real world emotions, rationalizations and temptations that international business teams face in their work? As a reminder, when it comes to foreign bribery, the distance between the Home Office, where compliance policies, rules and procedures originate, and the remote and often isolated offices where they hit the ground, could not be further apart. From my perspective, the WAH, which is where the dark side exists in between those two points, is critical to the success or failure of a compliance program at the field level. As a compliance VP said to me at a recent Oil and Gas Symposium, We know we have a robust compliance program, one which would satisfy the regulators, but what keeps me up at night is the question as to whether it is taking hold at the field. Indeed, formal control systems and standard operating procedures, essential though they are, have their limits. As Scott Killingsworth stated in a recent Roundtable Discussion in the Journal of Business Compliance, Compliance is about influencing the behavior of individual, free-willed human beings on a large scale in the face of temptation and pressure, which is a little different from, say, sterilizing a knee implant. So, with that said, let s take Dr. Miles at his word that the most powerful predictor for bad behavior turns out to be when people won t talk about bad behavior, and dig in. Let s focus on what Bill Below (Official at the OECD Directorate for Public Governance and Territorial Development) calls in The Policy Maker s Guide to Graft, the tipping points of corruption. Incentives To avoid any implication that I invented the relationship between compensation and behaviors, let me refer to a recent piece in the April 2015 Harvard Business Review, How To Really Motivate Salespeople (Chung), which states, studies of personality type show that salespeople have a larger appetite for risk than other workers, so a pay plan that offers upside potential appeals to them. This same risk tolerance that makes a low base salary acceptable in return for the possibility of very high contingent compensation can also foster acceptance of other kinds of risks, personally and on behalf of the company. Thus, when 2 May/June 2015 ethikos
you think about compensation, especially where you have teams in high-risk, low integrity regions, you have multilayered risk as potentially existing among the players and their environment. Add to that dynamic a public company setting where sales and bonuses are indexed to quarterly performance, and therein lies another peril: unstable sales cycles and incentive compensation. In many regions, especially in lucrative frontier markets, where procurement personnel are poorly trained, inadequately compensated and the rules of procurement are deliberately confusing, you have a territory that will be marked with sales instability. I have recalled numerous tenders that even after formal award, were indefinitely stalled or delayed, leaving goods sitting in warehouses waiting for a signature (read bribe ). So, what does all this have to do with compliance and the dark side? Everything. In such cases, where lucrative incentive plans are indexed to quarterly forecasts and individual performance (as opposed to group or corporate earnings), in high-risk regions or industries, are you leaving it to your front-line teams to ponder what does management really want, compliance or sales, as I can t deliver both. In other words, are field personnel left to their own devices when they compare robust compliance programs that speak to the social goals of anti-bribery, to a win above all else bonus plan? When that framing results in compliance decisions being made on the fly, as the dark side gets considered, it is to everyone s peril. But wait, it gets worse. Let s go back to those areas where you have quarterly forecasts, quotas based on them, and unstable sales cycles. In such regions, as Ellis well states, bribes may be baked into the economic order, as field personnel will look to third parties and intermediaries to move things along with public officials throughout the procurement process. In such cases, field personnel might even deliberately conspire, and through illicit means, to push and pull sales from quarter to quarter in order to make plan and quota. ethikos May/June 2015 3
As Mark Roberge points out in another HBR article, The Right Way to Use Compensation, a compensation plan is the most powerful tool you have. Indeed, as he points out, when you think about compensation, ask, What is the most important goal the company needs to achieve, and how can the sales compensation plan be aligned with this objective. I would add think globally but act regionally. In other words, do you really want to promote the goals of hedonic financial gain through a lucrative incentive package in a low integrity region? Or, is that plan more suitable to a stable region where the sales cycle is steady, the institutions of state are strong, and the risks of an eat what you kill bonus plan are more manageable. In addition, are you considering the timeframes? Are you sending a message through your quotas and forecasts that we don t pay bribes, no matter what? Are you delivering an incentive ARE YOU SENDING A MESSAGE THROUGH YOUR QUOTAS AND FORECASTS THAT WE DON T PAY BRIBES, NO MATTER WHAT? plan to your front-line teams that makes them whole financially when they refuse requests for even small bribes to move along a sale? Does your plan promote compliance over quarterly results to the point where a front-line manager knows that even the day before a quarter closes, that if saying no to a bribe means rolling that sale into the next quarter, or the quarter after that, there are no financial consequences of doing the right thing? Feel free to discard tone at the top. It s the next level up on the organizational chart which delivers the strongest message to those on the front lines, which is the WAH. Is your regional manager delivering the C Suite compliance message or is it make plan on those quarterly calls? These are the tipping points which can go either way at the front lines, so why not make sure your compensation plans tip to the right side. As Roberge well states the sales compensation plan should reflect the type of business you re in and the stage of the business you re at to which I would add and the regions in which you operate. What s normal in life? Returning to Dr. Miles WAH, he identifies the strong influence of what s normal in life as pertaining to the behavior of a person s immediate work group, and that such a group, as constituting a tribe, can defy all interventions from corporate control structures. In addition, as Dr. Miles adds, that tribe can include peer group workers at other firms, and I would add third parties and intermediaries as well. He continues, each member develops an over strong allegiance to the tribe they identify with; and the tribe as a whole develops a negative allegiance towards outsiders, which includes any more senior managers. Taking this model into high risk, low integrity regions, what s normal? In such areas, where employees operate remotely, often with little oversight, that tribe consists of employees, peers (including competitors) and third parties, in what has been best described as a cocoon of corruption. (Campbell, Goritz 2013) In such social systems, employees separate themselves from non corrupt individuals and share their open secret of corruption with other members. When this takes hold and Campbell s piece certainly produced a that was me moment as Dr. Miles states, the local version will usually win, especially if financial rewards remain the key social measures of success. In this cocoon, as front line personnel spend extensive and intensive personal and professional time with intermediaries, end 4 May/June 2015 ethikos
users and swap war stories with competitors, the cocoon takes on what Campbell calls a kind of war mentality, and as Miles states, that does not exactly foster the upwards reporting of non-compliance. To make matters worse (sorry), I reflect upon the work of Professor Francesca Gino, who I recently visited at Harvard, and who authored Sidetracked: Why Our Decisions Get Derailed which I wave around at every opportunity. In a working paper, Self-Serving Altruism: When Unethical Actions That Benefit Others Do Not Trigger Guilt (with Ariely, Ayal), she states that when others can benefit from one s dishonesty people consider larger dishonesty as morally acceptable and she adds simultaneously feel less guilt about it. Yet another that was me moment. As Professor Gino continues, the potential benefits dishonesty may create for others not only help us justify our bad behavior but also serve as a (self-serving) motivator for it. This isn t dark side, this is deep dark-side. Consider your front line business teams who might be incentivized through quarterly forecasts and quotas, and who work in high risk and low integrity regions where incentives are linked to personal performance. Now think of them working and often living among third parties, intermediaries and public officials who all might think of corruption as how things get done around here, and who all personally benefit from corrupt transactions. Finally, mix in the benefit to one s employer of closing a large sale. In such environments, especially given the often ethical blindness to the harmful impact of bribery on greater society and governance (future article), bribery can appear as a win win. How? In such cases, tribal members in the cocoon all benefit: the intermediary gets the success fee, the public official gets what might be thought of as a little something, and the employee makes plan (and hence bonus). Even outside the cocoon, the corporation gets the sale, its stock s value may rise, and jobs may even be saved or created. Everybody wins is pure illusion, yes, but as Scott Killingsworth has observed, when we start down the path of misconduct, the first person we deceive is usually ourselves. Such comforting rationalizations are not all that unique as enablers of WAH and dark side conduct. Worse, it does not have to be all or none as even some part of what I have described can be a tipping point at the front lines as to the engage in and hence, dark side, outcome. So, what does this mean? I think that is up to each reader and organization. I hope that by elevating the impact of incentives and the social cocoon, perhaps you might have a better understanding of two tipping points which can exert great influence at the front lines of international business. While the bell curve of human behavior might indicate that at the ends we have those who are solidly corrupt and noncorrupt, in the middle are those who struggle with ethical issues. By thinking of these two variables in the context of decision making, perhaps there is an opportunity to provide a helpful nudge in the direction of solidly non corrupt. By taking a clear eyed view of incentives, to ensure that they are properly aligned with the messages of anti bribery compliance, and by calibrating training to keep those in low integrity regions in the cocoon of ethics as opposed to the one of corruption, then aren t we really addressing the WAH, so as to have a robust compliance program which is also well understood and grounded in even the worst of environments? Richard Bistrong is a former International Sales Executive, FBI/UK Cooperator, and served prison time for his own FCPA violations. He is now CEO of Front-Line Anti-Bribery LLC and can be reached via his website, www.richardbistrong.com, @richardbistrong, or at richardtbistrong@gmail.com. ethikos May/June 2015 5