Managing Risk from the Top to Bottom

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How to Safeguard Against Misconduct From C-Suite Level to Regular Employees – and Using HR as a Gatekeeper

Presented at American Conference Institute’s 3rd Asia Pacific Summit on Anti-Corruption, Compliance and Risk Management December 03-04, 2014, Hilton Singapore

Eric Pesik Associate General Counsel and Compliance Officer Seagate Technology International Bradley Klein Partner Skadden, Arps, Slate, Meagher & Flom Thiru Sethuraman Director, Ethics and Compliance Cummins Distribution Business

Defining Your Legal Universe

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Legal Universe • Local vs Home

Jurisdiction • Collateral Laws and

Related Issues • Territorial vs Personal

Jurisdiction

Judge by Luis Prado from The Noun Project http://thenounproject.com/term/judge/3953/

Risk Mitigation Actions From the Top

Hierarchy designed by Murali Krishna from the Noun Project http://thenounproject.com/term/hierarchy/31709/

86% of corporate fraud is known or perpetrated by senor executives

Data: Corporate Executive Board, 2006

86%

Quote: RAND Symposium Culture, Compliance and the C-Suite Image:: Team designed by Wilson Joseph from the Noun Project http://thenounproject.com/term/team/35432/

If you wanted to design an incubator for generating misconduct, it would look a lot like the C-Suite

$75,000

$130,000

$500,000

Employee

Manager

Executive/Owner

Median Loss (USD) to Fraud by Position of Perpetrator

Data: 2014 Report to the Nations on Occupational Fraud and Abuse. Copyright 2014 by the Association of Certified Fraud Examiners, Inc.

CEOs are prone to viewing the company’s success as indistinguishable from their own.

Quote: Scott Killingswroth, Partner Bryan Cave LLP “C” is for Crucible Superhero designed by Juan Pablo Bravo from the Noun Project http://thenounproject.com/term/superhero/23556/

0.00%

-0.50%

-0.10% -0.20%

-0.40%

-1.20%

-0.60%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 Net Profit Margin

Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)

Companies that bribe have poorer net profit margin (net income divided by sales revenue)

2.70%

5.10%

3.20%

0.90%

2.30%

1.40%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 Sales Growth

Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)

Companies that bribe have greater sales growth compared to control firms

-2.90%

0.50% 1.50% 1.60%

0.30%

-4.60%

-6.80%

Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 Cumulative Abnormal Returns

Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)

Companies that bribe have poorer cumulative abnormal returns (difference between the sum of the monthly returns for bribing firms versus control firms)

From the Top • Tone From the Top • Risk Management

Oversight • Establishing Internal

Controls • Guiding Middle

Management

Risk Mitigation Actions From the Middle

Image:: Group designed by Tonielle Krisansk, public domain http://thenounproject.com/term/group/7771/

From the Middle • Tone From the Middle • Anticipate and Recognize

Ethical Dilemmas • Communicate Ethical

Values • Report to Top

Risk Mitigation Actions At the Frontline

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42.0%

26.2%

18.6%

Employee

Manager

Executive/Owner

Occupational Fraud Frequency by Position of Perpetrator

Data: 2014 Report to the Nations on Occupational Fraud and Abuse. Copyright 2014 by the Association of Certified Fraud Examiners, Inc.

Pressure

Fraud Triangle

Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973) Image:: Deep-Web Designed by Matt Brooks, Public Domain, http://thenounproject.com/term/deep-web/62765/

Top Behavioral Red Flags

Data: 2014 Report to the Nations on Occupational Fraud and Abuse. Copyright 2014 by the Association of Certified Fraud Examiners, Inc.

Living Beyond Means

Divorce/ Family Problems

Financial Difficulties

Unusually Close Association with Vendor/Customer

Control Issues, Unwillingness

to Share Duties “Wheeler-Dealer”

Attitude

Control Issues, Unwillingness

to Share Duties

Employee

Executive Manager

“Wheeler-Dealer” Attitude

When the big people get in trouble, the little people get ethics training.

Quote: RAND Symposium Culture, Compliance and the C-Suite Image:: Education designed by Chris Matthews http://thenounproject.com/term/education/3012/

At the Frontline • Implement Tone From

the Top and Middle • Anticipate and Recognize

Ethical Dilemmas • Internalize Ethical Values • Whistleblower Hotlines

Gatekeeper: Human Resources

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Human Resources • New Hires • Align Performance and

Compensation • Structural Alignment • HR Policies • Training • Communication

Case Study JP Morgan

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Case Study: GlaxoSmithKline

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Key Areas of Focus for Compliance

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Focus for Compliance • Policies • Education • Enforcement • Remediation

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1. Mandate and Commitment

4. C

omm

unic

ate

and

Cons

ult Risk Identification

Risk Analysis Risk Evaluation

2. Risk Assessment

6. Tools and Resources

5. M

onito

r an

d Re

view

3. Risk Treatment

Risk Management Model (ISO 31000, modified)

Issues and Control Points

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Issues and Control Points • Using Third Parties • Expense Reimbursement • Events and Hospitality • Other Key Areas

Questions?

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Please like and share! View other presentations: http://www.slideshare.net/ericpesik/presentations

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Additional Resources • Ethics Resource Center

www.ethics.org • International Business Ethics Institute

www.business-ethics.org • Ethics Web Resources

http://www.ethicsweb.ca/esources/index.html • ISO 31000 standard

http://www.iso.org/iso/home/standards/iso31000.htm • Association of Certified Fraud Examiners

http://www.acfe.com/ • RAND Corporation: Culture, Compliance, and the C-Suite

http://www.rand.org/pubs/conf_proceedings/CF316.html • How Much do Firms Pay as Bribes and What Benefits do They

Get? Evidence from Corruption Cases Worldwide http://ssrn.com/abstract=1772246

• Bribes and Firm Value - Evidence from Anti-Bribery Regulation http://ssrn.com/abstract=2179437