Both last month’s massive congressional “stimulus” package and the ongoing Troubled Assets Relief Program bailout are taking the federal government where it has never gone before in its relationship to private business. At present, the center of gravity in the financial and other major industries arguably has shifted to Washington because, as notorious bank robber Willie Sutton might say, “that’s where the money is.”
Given the unprecedented injection of taxpayer funds into private industry, bailout recipients should prepare for an equally unprecedented level of scrutiny into business matters that previously avoided government oversight or enforcement. Political considerations also threaten to warp the normal forces governing business affairs. For business executives not steeped in the ways of Washington, where oversight hearings can be more show trial than objective inquiry, this phenomenon will be particularly unsettling. Companies’ operations may be exposed to the whirlwind of government investigations and related actions that sometimes are driven more by political agendas and media speculation than by performance metrics.
High risks for some executives
The saber-rattling for enforcement actions against individuals is a warning worth heeding. Although the government likely will not pursue enforcement actions against the companies and industries it is trying to save, individuals suspected of wrongdoing will likely take central spots on the enforcement stage.
Executives called on the carpet under the spotlight of congressional hearings also may become inviting enforcement targets. While some in Congress utilize legislative and oversight hearings for substantive purposes, others see great political opportunity in excoriating well-paid executives. One sometimes expects at the latter type of hearing to see Madame DeFarge waiting in the wings with her knitting needles and ready exultation to roll heads. Perhaps this is necessary to satisfy the public’s need to personify a cause of the financial crisis, but intimidating executives in general, upon whose entrepreneurial and risk-taking judgments any recovery depends, does not seem particularly productive to achieving public objectives. For executives, understanding how this political atmosphere affects the way enforcement authorities think and act can help them and their companies avoid further trouble.
The following general observations drawn from executives’ prior trips to Capitol Hill provide both valuable examples of what a corporate representative considering an invitation to testify before Congress can expect and some insight into how to steer clear of creating new issues if the invitation is accepted. Failing to heed these general observations risks reputation and substantial expense.
• Do not expect a fair fight. The decorum in a political chamber, or lack thereof, contrasts drastically with that in a boardroom or even a courtroom. Members of Congress can distort, or simply ignore, well-reasoned assertions that a company’s or executive’s actions fully complied with company procedures, industry practices and the law. The fact that the chief executive officer’s compensation was determined by a compensation committee, for example, will not derail political efforts to vilify the executive. The public, media and politicians will search for a villain to blame for any crisis, and are likely to find the villain in the person of an executive who expects a level playing field for his or her appearance before Congress. As one member told an executive at a hearing, “If you haven’t discovered your role, you’re the villain today.”
• Symbolism is powerful. It is impossible to predict what conduct will generate public criticism, but the failure to screen every aspect of an appearance before Congress for potential political spin risks losing control of the message the executive or the corporation sought to convey. Everything that can be controlled, should be, down to who is sitting with or near the executive witness and the mode of transportation to the hearing. Big Three auto executives, for example, got an earful from members about flying in for hearings on private jets. Advisers cognizant of these details, and how the details can be spun in the media, are essential to avoiding inadvertent missteps because even routine corporate actions — including those justified by need or industry practice — can make inviting political targets. Conversely, it is possible to turn the media and public attention to an advantage. Thus, it is critically important to carefully consider not only the substantive reasons for engaging Congress, but also the public relations aspects and political consequences of such engagement.
• No free lunch. For companies that receive federal assistance, the public’s perception of a particular activity or operation will be more important than the actual bottom line or net cost. Federally assisted organizations will find the political costs of many activities to be unbearable, even when the activities cannot be changed or cancelled without a net loss. A Las Vegas retreat was characterized by a member of Congress as “roll[ing] the dice on the taxpayer dime.” The fact that members of Congress may have treated themselves to similar luxuries, such as resort retreats at taxpayer expense, will provide no refuge.
Steps for coping with the new environment
Especially for companies accepting federal assistance, business behavior that runs afoul of either legal standards or current public expectations will invite heavy enforcement attention and a public thrashing in the emerging Washington political tradition.
Several affirmative steps, however, can make it easier to cope with the risks of the current environment: effectively communicating the company’s commitment to compliance, efficiently targeting available compliance resources at the company’s highest-risk areas and demonstrating a studied effort to discover and, when necessary, remediate compliance issues.
The importance of effective communication
Effectively communicating to politicians, enforcement authorities and the general public that the company is sensitive to, and is on top of, an issue is critical to not becoming an easy target for political opportunists. Becoming well-positioned requires responding aggressively to internal or external allegations of impropriety or wrongdoing. A more typical tepid response, such as “the company takes its legal obligations seriously and will look carefully into this matter,” serves only as fodder for political cannon fire.
Attentive directors, particularly those serving on audit committees, must ensure that a proactive message is backed by proactive behavior. Unresolved compliance issues can seriously impair or even destroy a corporate reputation and can result in individual executives facing long investigations and potential prison sentences.
Given the confluence of stepped-up enforcement of corrupt business payments (e.g., recent Foreign Corrupt Practices Act dispositions of $800 million in penalties against Siemens A.G. and $579 million against former Halliburton Co. subsidiary KBR), the presence of national security concerns in enforcement priorities (e.g., the recent $350 million fine against Lloyds Bank for Office of Foreign Assets Control violations involving Iran) and the likely allocation of new resources to combat business crime (e.g., new U.S. Securities and Exchange Commission Chairwoman Mary L. Schapiro’s promise to “take the handcuffs off the Enforcement Division”), companies should assess whether their compliance programs are effectively managing their greatest risks.
Compliance should not be a priority for compliance’s sake, but as an effective risk-management tool. Using risk assessment to target compliance efforts at the greatest risks is prudent financial management in these difficult economic times.
More focused compliance efforts are needed
Accordingly, the current environment calls for more focused compliance efforts, tuned specifically to the new reality of federal intervention and aid. Compliance expenditures may be a hard sell in hard times, but the price of neglect or mistakes is exponentially higher. To get the most “bang for the buck,” a solid risk assessment should identify the operations facing the highest compliance risk and provide management with the necessary information to eliminate or mitigate the most risk per compliance dollar.
Even the best-managed companies have compliance problems; in fact, most do. When a problem surfaces, companies can mitigate the fallout from the resulting investigation with a demonstrable corporate history of meaningful and dedicated efforts to assess, test, investigate and, where necessary, remediate operations for compliance purposes. A company that exhibits such a studied effort to investigate compliance issues and provides full cooperation to investigating authorities on fact-gathering (full cooperation does not mean capitulation to liability: facts first, fight later) will have positioned itself as well as possible to deal with any troubled operations. Those with the least problems going forward will be those taking wise steps now to effectively manage the increased risk presented by today’s dynamic enforcement and compliance environment.
George J. Terwilliger III is a partner and the global head of the white-collar practice in the Washington office of White & Case. He previously served in the Department of Justice for 15 years, including as deputy attorney general of the United States and a U.S. attorney, and he chaired the interagency Financial Fraud Task Force during the savings and loan crisis.
