Category: Compliance Programs

Whales and Compliance

watching giants

I was surprised to be thinking about compliance while I was reading about whales. Sure, I eat, drink and sleep compliance. But there are some lessons that compliance professionals can learn from the study of whales.

This came up while I was reading Watching Giants: The Secret Lives of Whales by Elin Kelsey.

My original interest in the book was its intersection between parenthood and whales. During college I took a class at the New England Aquarium on marine mammals taught by world-renown experts. The class was fascinating on many levels. As a parent, well, I find parenting itself interesting.

Whales are incredible species, reliant on breathing air, but needing to dive the depths of the ocean for food. For example, as the book points out, a blue whale opening its mouth to take in a school of krill is the biggest biomechanical event to happen on the planet. The scale of a whale’s life is well beyond the scale of humans. If you read about the parenting life of whales, I think you will be hard-pressed to believe that we have hunted many of these species to the brink of extinction.

Getting back to the compliance side of things, whales are hard to study. Fraud, corruption and misdeeds are hard to study. Whales spend over 95% of their time outside the boundary of human observation. The deeds that compliance professionals are looking for are also, for the most part, outside of our perception.

The compliance lesson that resonated with me was that we should not assume that we can see is truly representative of what is actually happening beneath the surface. We need to understand our perspective. What we can see and what we cannot see. When you look beneath the surface, something unexpected may be happening.

If you are looking for a good book to read, try Watching Giants: The Secret Lives of Whales.

Perception, Dilbert and a Magical Management Necklace

Are your assumptions correct?

You get a new tool to help manage your processes and everything starts working better. Is everything actually working better? Or is the data just being manipulated to look better?

As is often the case, the pointy-haired boss can show us the problem.

Often the compliance officer is like the pointy-haired boss. Everyone is on their best behavior when you are around. But what’s happening when you aren’t looking?

Its a matter of perception.

Hulk Smash Compliance Program!!

incredible hulk

Hollywood has done it. Now it’s your turn.

Reboot your compliance program.

There is the “reboot” you hear from IT support when your computer is malfunctioning. It seems to always be the first response from the help desk. But once you start back up, its exactly the same computer with exactly the same programs.

Hollywood took “reboot” a step further when it started rebooting old shows, movies and franchises. They originally used the term re-image, where they did not closely follow the original. But now they have gotten much more aggressive and thrown much of the original out the window to go from ‘re-image’ to a “reboot.”

Unless you were living in a cave this summer, you know that they rebooted the Star Trek franchise. Its still the same character names and they are still on Enterprise. They shook off forty years of legacy storylines for a fresh new start.

Ronald D. Moore and David Eick rebooted Battlestar Galactica in 2003 and it finished airing last spring. The original Battlestar Galactica aired in 1978. (We won’t talk about the dreadful Galactica 1980.)  They changed many things in the new version, but kept the character names. Other than the names, they paid little respect to the original characters and even changed the genders of Starbuck and Boomer.

Like Star Trek they kept some clues to the past by keeping an actor from the original. Leonard Nimoy came back as Spock for Star Trek. Richard Hatch, Apollo in the original Battlestar Galactica, was recast as the political leader Tom Zarek in the reboot.

The reboot that inspired this post was the Incredible Hulk. The 2005 movie was a reboot of the terrible 2003 Incredible Hulk. They just ignored the 2003 version and started over. They switched out the director and switched all of the actors. Of course the movies were a reboot of the Lou Ferrigno Incredible Hulk TV Series, which in turn was a reboot from the original comic book. All these Hulk reboots seem to embody Hulk’s catchphrase: “Hulk Smash!!”

Do something new, pretend the old never happened.

Your aim is to end up with something better by shaking off the legacy storylines. You get a fresh creative start.

You still have the same goals and the same basic framework for compliance. Just like Star Trek was still about Kirk and Spock on the Star Ship Enterprise.

It’s not that your original compliance programs didn’t work. Star Trek, Battlestar Galactica and the Incredible Hulk were successful prior to the reboot.

But it could be better, fresher and more appealing.

Smash it and start over.

Thanks to Jeffrey Brandt for inspiring this post, with his post: “Reboot” Your Knowledge Management Program. (Okay. I flat out stole his post, changed a few words and replaced Thunderbirds with Star Trek.)

Happy Thanksgiving

That means an extra long weekend for me.

Truman at the White House thanksgiving

The White House traditionally pardons their turkey. The tradition is credited to President Truman who received a White House turkey for Thanksgiving. But there is no evidence that he spared the life of the turkey. According to an in-depth investigative report by the Washington Post, it was George H.W. Bush (41) who first officially pardoned a Thanksgiving turkey:Turkey Pardons, The Stuffing of Historic Legend.

Enjoy the long weekend if you can. I have some stuff in the oven for when I’m back on Monday.

Thanksgiving_oven

Oven image by Joseph Zollo on Wikimedia Commons:Thanksgiving oven.jpg

New Workplace Posters – EEO is the Law

EEO Law

Starting November 21, 2009, you need a new workplace poster: EEO is the Law.pdf-icon

There are two new federal workplace laws the Genetic Information Non-Discrimination Act and the ADA Amendments Act. Federal law requires all employers covered by the federal anti-discrimination laws (those with 15 or more employees) to post multilingual notices describing the federal laws against job discrimination.

If you want a fresh poster you can use print out and use the “EEO is the Law“pdf-icon poster. If you already have a EEO poster, you can just add the “EEO is the Law” Poster Supplement.pdf-icon

References:

Criticism and Praise

drunkards walk

Do criticism and praise work to affect performance?

Leonard Mlodinow briefly addressed this topic in The Drunkard’s Walk: How Randomness Rules Our Lives. He explores the studies of Daniel Kahneman who was lecturing the Israeli air force flight instructors on behavior modification. Kahneman was trying to make the point that rewarding positive behavior works, but punishing mistakes does not.

One of the students called him out. He had praised people warmly for beautifully executed maneuvers and the next time they do worse. He screamed at people for badly executed maneuvers and they improve the next time. The other flight instructors agreed. But Kahneman’s research demonstrated that rewards worked better than punishment.

So what was going on?

Regression toward the mean. In a random series of events, an extraordinary event is most likely to followed by an ordinary one. Due purely to chance, it’s hard to have two extraordinary events in a row.

The fighter pilots have a certain level of ability. An extraordinarily good performance is most likely to be followed by an ordinary performance. So the praise would seem to fail to maintain the extraordinarily good performance. Similarly, an extremely bad performance is most likely to be followed by an ordinary performance, which in this case would be better than the bad performance. So the screaming criticism would seem to cause an improvement in performance.

So it appears that the criticism does some good and the praise does no good. What is really happening is a misconception of uncertainty and probabilities. The connection between actions and results is not as direct as we might think.

In compliance, we eschew lots of data. It’s good to step back every now and then to think about the implications of the data and the underlying assumptions.

Trust and Financial Regulation

colombo

Ronald J. Colombo of Hofstra University School of Law wrote a great paper on The Role of Trust in Financial Regulation.

Trust is an important part of our financial markets. Scandals, massive incompetence, massive irresponsibility, massive fraud, have shaken trust in the financial markets. Commentators, policy makers, and industry leaders have all recognized the need for trust’s restoration.

Consistent with financial scandals in the past, the public officials are looking for increased regulation to restore trust in the markets. The last round of financial scandals in the Enron-WorldCom era brought us Sarbanes-Oxley.

Professor Colombo thinks the advocates for increased regulation have it half right.

“A critical set of questions should be considered. Can regulation serve to bolster and repair relationships dependent upon trust? And in the absence of trust, can regulation serve as an effective substitute to trust? In short, are there limits to the ability of regulation to resuscitate an economy that has suffocated due to lack of trust?

Conversely, can regulation work to “crowd out” trust, effectively transforming relationships that once were close and trustworthy to arm’s length and legalistic? Could regulation serve to displace relationships of trust with transactions subject merely to the “morals of the marketplace”?”

The Role of Trust in Financial Regulation applies trust scholarship to examine the current U.S. financial regulatory regime and some of the proposed reforms. I focused on a few sections.

Private Offering Regulation

In addressing the difference in treatment between the regulation of public offerings and private offerings, Mr. Colombo thinks the difference can be justified on grounds relating to the issue of trust.

A private offering is more like a personal contract between the issuer and the investor, free of public advertising. Also, a private offering is more likely to have a pre-existing relationship. “Interpersonal relationships and communications are conducive to such trust, and such relationships and communications are often found among the parties to a private offering.”

He concludes that the current regulation of private offering strikes the correct balance from a trust-favoring perspective.

Regulation of Investment Advisers

I found it interesting that Mr. Colombo spends some time focused on the 15 client rule exemption from registration. He finds that much of the investment adviser regulation has developed a heavy band of regulation that “can crowd out trust in a relationship, converting expectations and behavior based upon honor and integrity to those based on the letter of the law.”

Investment advisers with a small number of clients can have “closer, more personal and more lasting relationships with their small number of clients than those advisers with a much larger client base.” The small adviser exemption from regulation when you have fewer than 15 clients facilitates the trust aspect.

The Private Fund Investment Advisers Registration Act, just approved by the House Financial Services Committee, eliminates this exemption.

Hedge Funds

From a trust perspective, Mr. Colombo thinks the lack of hedge fund regulation seems sensible. As with the world of investment advisers, the hedge fund industry is marked by repeat players. Frequent and historical interactions among the parties can “lay the foundation for affective and generalized trust to develop.” After all, the original legislative intent of the U.S. securities laws was to protect the layperson, unfamiliar with the financial markets, with sophisticated investors fending for themselves. Give the high financial thresholds for investment in private funds, the investors are either sophisticated or have easy access to sophisticated investment advice.

Regulatory Reforms

Mr. Colombo does not seem to like the removal of the small adviser exemption from investment adviser regulation. For larger advisers, the increased disclosure and reporting requirements may be a good things.

As for hedge funds he thinks that hedge funds currently operating successfully on the basis of trust, with little regulation, have little to benefit their investors by registering with the SEC  and submitting themselves to the regulatory oversight. However, for funds that have not been able to develop that trust, voluntarily registering and submitting themselves to the regulatory oversight could help develop that trust. (I’m skeptical that investors think SEC registration carries any value in the world of private funds.)

The paper concludes that the existing financial regulatory regimes do a pretty good job with our understanding of trust. Greater regulation is imposed upon those sectors of the financial services industry where such regulation is trust enhancing, and lesser regulation is imposed upon those sectors where such regulation is trust defeating.

“In those areas where high quality trust relationships exists (or have the greatest potential to exist), we have, relatively speaking, the lowest levels of regulation: private offerings, investment advisers, and hedge funds. In those areas where only lower quality trust relationships are likely to exist (that is, relationships of cognitive and specific trust), we witness the highest levels of regulation: public offerings, secondary market trading, and banking.”

He also points out the more important areas of the capital markets are more heavily regulated. After all, we cannot wait to see if trust can be developed if the failure will lead to a systemic breakdown. The turbulence after the Lehman collapse was in part caused by the lack of trust. Nobody was sure if they could trust the stated financial stability of their counterparty.

References:

Colombo, Ronald J., Trust and Financial Regulation (October 1, 2009). Villanova Law Review, Forthcoming; Hofstra Univ. Legal Studies Research Paper No. 09-22. Available at SSRN: http://ssrn.com/abstract=1481327

Some other references from The Role of Trust in Financial Regulation:

Windex and Compliance

Katie Liljenquist

People are more fair and more generous when they are in clean-smelling environments, according to a soon-to-be published study: The Smell of Virtue.

The experiment had participants engage in several tasks, the only difference being that some worked in unscented rooms, while others worked in rooms freshly spritzed with citrus-scented Windex.

The first experiment was a test of whether clean scents would enhance reciprocity. Participants received $12 of real money. They had to decide how much of it to either keep or return to their partners who had trusted them to divide it fairly. Subjects in clean-scented rooms returned a significantly higher share of the money. The average amount of cash given back by the participants in the unscented room was $2.81. But the participants in the Windex room gave back an average of $5.33.

The second experiment evaluated whether scents would encourage charitable behavior. Test participants indicated their interest in volunteering with a campus organization for a Habitat for Humanity service project and their interest in donating funds to the cause. Participants surveyed in a Windex room were significantly more interested in volunteering (4.21 on a 7-point scale) than those in a normal room (3.29). In the Windex room, 22% participants said they’d like to donate money, compared to only 6% of those in a unscented room.

Follow-up questions confirmed that participants didn’t notice the scent in the room.

The results are consistent with the “broken windows” theory of crime that argues disrepair in the environment promotes lawless behavior.

Katie Liljenquist, assistant professor of organizational leadership at BYU’s Marriott School of Management, is the lead author on the piece in an upcoming issue of Psychological Science, with co-authors are Chen-Bo Zhong of the University of Toronto’s Rotman School of Management and Adam Galinsky of the Kellogg School of Management at Northwestern University.

References:

Thanks to Mary Abraham of Above and Beyond KM for pointing out this study.

Compliance and Solitaire

solitaire

Compare playing solitaire on your computer against using a deck of cards to play solitaire. The computer won’t let you cheat. You can’t put the card on a stack if it doesn’t belong on that stack. The rules are embedded in game’s software.

Ultimately, that should be one of the goals for compliance. You want the business rules to be embedded in the software applications that run your business processes.

Of course, for many things that is really hard to do. The rules of solitaire are simple. The rules for compliance are often not. (Maybe that means you need to simplify some of your rules.)

Richard Susskind, author of The End of Lawyers?: Rethinking the Nature of Legal Services, uses this concept in explaining the future evolution of legal services. I found it equally useful when thinking about embedding compliance into business processes.

What do you think?