& Professional Compliance Ethics

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 (tbanks@scharfbanks.com) 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.