Fighting Words

In Wake Of Corporate Scandals, A Reminder That Integrity Is Good Business

  on September 04 2013 10:32 AM

The insider trading indictment of SAC Capital Advisors and GlaxoSmithKline’s (NYSE: GSK) massive bribery scandal in China are just two recent cases revealing a business culture in which legal compliance programs appear to have met with spectacular failures. SAC bragged about having a “strong culture of compliance,” yet it now faces insider trading charges on an unprecedented scale in the hedge fund industry. And Glaxo’s internal compliance efforts failed to uncover a $450 million bribery scheme that the giant drug company has now admitted.

Failures of this sort occur far too often, even when companies like SAC and Glaxo devote scores of employees and millions of dollars to their compliance programs. An underlying problem is that companies typically rely on “law-driven” compliance rather than “business-driven” integrity programs. Law-driven programs seek to avoid punishment by meeting the letter of the law without developing a deeply rooted culture of integrity. In many cases, law-driven programs are only grudgingly tolerated by executives and employees, and they often fail as a result.

By contrast, a business-driven integrity program is much more likely to prove effective because business people from the top down (not just the legal department) embrace and promote it as essential to the long-term success of the enterprise. A business-driven program is viewed throughout the company as a profit center and a competitive advantage, rather than a cost center or an “obstacle.”

This approach makes a fundamental difference when employees confront real-life issues such as kickback arrangements, price-fixing or insider trading. Their responses become less a matter of consulting a legal guidance memo than fulfilling the company’s basic mission and business model. The core principle is that good ethics is good business. Integrity and honest dealing lead to an enhanced business reputation and long-term success, for individuals and corporations alike.

Starbucks Corp. (NASDAQ:SBUX) is a case in point. Its founder, Howard Schultz, announced in an early memo: “We will not compromise our ethics or integrity in the name of profit.” The company set high ethical standards for itself and its suppliers. It provided employees with health care and other benefits far beyond what the law required, and it offered coffee growers higher prices in exchange for better labor and environmental practices. By adopting stringent standards internally and externally, Starbucks created a culture in which both broader business integrity and strict legal compliance could flourish. And, not coincidentally, the company’s culture has helped put it at the top of its industry.

Effective integrity programs become all the more important as Western companies move into emerging markets where legal cultures may be weak and corruption rampant. At the same time, businesses should support whistle-blower and anti-corruption laws that protect competition and maintain a level playing field, both here and abroad. For their own good, U.S. companies must do more to insist on market integrity.

Nevertheless, many businesses resist anti-corruption laws. That resistance should end. For example, statutes such as the False Claims Act and the SEC's whistle-blower law enjoy bipartisan support as vital tools in battling fraud and maintaining free markets, yet the U.S. Chamber of Commerce has opposed those laws in Congress, the courts and the press.

The Foreign Corrupt Practices Act also has faced opposition from the business community. But the statute’s track record shows that it benefits U.S. businesses seeking to expand into foreign markets. The 10 largest FCPA settlements so far have produced approximately $3.5 billion in recoveries; nine of those 10 settlements, amounting to nearly $3 billion, have come from foreign companies. Such cases typically arise when companies bribe foreign officials to win government contracts – potentially excluding U.S. companies that might compete for the same business.

The Glaxo case illustrates the need for more-effective approaches to business integrity through both internal compliance and external law enforcement. Glaxo reportedly bribed Chinese government officials as well as doctors and hospitals to increase its drug sales and exclude competition. The company’s internal investigation of a whistle-blower complaint failed to uncover the wrongdoing. When government investigators later made similar allegations, Glaxo initially dismissed the matter but soon reversed course and admitted the scheme.  

One of the best tests of a corporate compliance program is how the company responds to internal whistle-blowers who report misconduct. If the company is serious about business integrity, it will welcome the report, investigate it vigorously, and shield the whistle-blower from retaliation. Here, again, good ethics is good business. When whistle-blowers are ignored and penalized, often their next stop is a prosecutor’s office.

In the end, the overriding goal should be the reform of corrupt industries and markets, not just individual companies. That goal can be achieved only by combining powerful business-driven integrity programs with effective law enforcement. Out of enlightened self-interest if nothing else, American businesses should support that combined effort enthusiastically.

Neil V. Getnick is the managing partner of Getnick & Getnick LLP, a New York City-based law firm concentrating in anti-fraud litigation and business integrity counseling.

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