Tag Archives: sales_governance

Big Governance Will Thwart the Next Corporate Ethics Disaster

Imagine you are at an airport bar waiting for a long-delayed connecting flight. A villain sidles up to you and offers to buy your next drink. How would you react?

I don’t mean a fictional villain like Norman Bates, Hannibal Lecter, or Nurse Ratched. I mean a real-life corporate scoundrel, dressed for success, jetting his way to Somewhere Important. A Shigehisa Takada, Martin Winterkorn, Ray DeGiorgio, or Michael Pearson.

If identifying white collar villains sends you reaching for the nearest facial recognition app, that’s the point. Unlike popular villains from movies and literature, corporate villains are pretty ordinary. No weird tics, quirks, or evil laughs. Mainly, they’re paunchy and middle-aged. Quintessential bureaucrats, who blend discretely with the polished wood and carpet at the United Club. I can visualize any of these men standing at a conference room lectern, droning about revenue projections, while confidently twirling a laser pointer in a haphazard circle around some inscrutable pie chart. “Questions? No? Well, then – let’s call it a wrap. I’m late for my next meeting.”

Ordinariness partly explains how companies lose their ethical way. Business-as-usual provides a vital smokescreen for unethical shenanigans. The many VW functionaries whose efforts unleashed 11 million CO2-belching vehicles onto the planet’s roadways unwittingly performed this travesty while enduring countless dull operations meetings, prosaic management requests, and bland internal emails. In essence, crafted code words and Euphemisms kept the devious sales machinery humming. Someone should compile a dictionary for 2016. I’ll supply the first entry: “defeat device.”

Still, I’m an optimist. I believe commercial enterprises generally begin life without corruption baked into the strategic plan. So how does corporate deceit begin and become systemic? What makes some organizations fecund for scandals, while others consistently maintain the ethical high road? There are three conditions, but they are not always apparent: High motivation to attain a financial reward, opportunities to cheat, and an individual’s ability rationalize his or her deceit. Elements that Donald Cressey labeled The Fraud Triangle (see Other People’s Money: a Study in the Social Psychology of Embezzlement.)

The first two conditions are near-ubiquitous in the workplace, and I don’t know any human over the age of two incapable of rationalizing a lie. Yet, most employees don’t deliberately drag their companies into scandals. What else? I thought hard about this conundrum, and realized the need to conjure additional reasons. It didn’t take long to find two suspects: unicorns and lack of governance.

Unicorns. In a December, 2015 article, The Creed of Speed, The Economist describes the pressures that Unicorns – startups on steroids – create. “Unicorns can win billion-dollar valuations within a year or two of coming into being. In a few years, they can erode the profits of industries that took many decades to build. Like dorks in awe of the cool kids, the rest of America’s business establishment chastises itself for being too slow.” Yikes! The revenue rug ripped out from under your feet not over years or months, but over crazy-short time frames. As we have learned, “Get creative about driving revenue!” now carries sinister meaning. Around the world right now, Takada automotive airbags, sold with known defects, continue to explode, killing and maiming vehicle occupants.

“If you ask the boss of any big American company what is changing his business, odds are he’ll say speed. Firms are born and die faster, it is widely claimed. Ideas move around the world more quickly. Supply chains bristle to the instant commands of big-data feeds. Customers’ grumbles on Facebook are met with real-time tweaks to products. Some firms are so fast that they can travel into the future: Amazon plans to do ‘anticipatory’ shipping before orders are placed,” according to The Economist. “We are putting a premium on speed,” GE CEO Jeff Immelt wrote in his letter to shareholders. IBM CEO Ginny Rometty, echoed his sentiment. “People ask, ‘Is there a silver bullet?’ The silver bullet, you might say is speed, this idea of speed.”

Revenue flows to the nimble and quick. Slow movers are losers. No doubt that deposed VW CEO Martin Winterkorn would adamantly agree – if anyone sought his opinion. Facing rapid upheaval in the automotive market, Winterkorn and his management team discovered an opportunity to juice sales that was too fantastic to ignore. Instead of investing hundreds of millions of Euros in diesel engine development over a long lead time, they could spend a pittance to modify some closeted software, and sell today’s production sehr schnell. Duh! The ROI numbers in Wolfsburg must have soared off the charts faster than a departing Lufthansa jetliner. At the time, the multi-billion dollar costs of government penalties, class-action lawsuits, and widespread customer backlash didn’t make it onto spreadsheets. Oops. “Cheating? No. It’s Event-Induced-Sensor-Reconfiguration. That’s longish, so for marketing purposes, we’re calling it Clean Diesel.”

Lack of governance. When inmates run the asylum, [stuff] happens. Shortly after news of the scandal broke in 2015, Volkswagen CFO Hans Dieter Poetsch told reporters “We are not talking about a one-off mistake, but a whole chain of mistakes that was not interrupted at any point along the line.” Interim Chief Executive Matthias Mueller gave a different spin, saying the investigation had revealed that “information was not shared, it stayed within a small circle of people who were engineers.” Those damn engineers. What do they know about designing systems with integrity? But I like Poetsch’s version, which I’ll rephrase: “No one in authority said, ‘That’s wrong. We will not do that. Period.’” The absence of anyone at VW to stand tough and pull the plug on cheating cost billions of dollars, thousands of jobs, and continues sicken and kill people suffering from respiratory disease. That’s a price no society can afford to pay. And Poetsch’s statement applies not just to VW, but to every high-profile ethics debacle.

Enter, Big Governance. Ethics cases demonstrate that rogue employee behavior presents significant risks for companies. Conduct risk, “the risk that arises as a result of how businesses and employees conduct themselves, particularly in relation to their clients and competitors,” now ranks #2 of the Top 10 largest fears for operational risk practitioners at financial services firms, according to Risk.net, an industry website. That’s ahead of terrorism (#9), IT failure (#8), and regulation (#3). Wow.

When scandals surface, people often ask, “why didn’t anyone speak up?” That’s part of the issue. In many cases, people did speak up. Loudly. But their concerns were crushed. The better question to ask is “why didn’t the company have mechanisms to expose and prevent the problem?” That matter deeply concerns corporate boards across many industries. Governance provides the mechanisms to mitigate ethical risk, by specifying management responsibilities, auditing and oversight, reporting, decision rights and accountability.

Governance doesn’t have to be big, but its rewards almost always are. The purpose of governance is to encourage ethical behavior. Some say that smacks of weak parenting. In today’s get-it-done business environment, encourage seems tepid. But here, it’s the right word. Ensure and guarantee don’t belong. We’re talking about people, not algorithms.

“In most instances, reputational damage is triggered by some other business or operational risks, including risks relating to the quality or safety of the company’s products or services, or illegal, unethical or questionable corporate conduct of which the public was not aware. How boards respond to these risks is critical, particularly with the increased scrutiny being placed on boards by regulators, shareholders and the media,” according to the website of Akin Gump, a law firm.

With governance, boards are the right place to start, but they face knotty challenges. Effective governance must harmonize opposing business demands: ethics, enterprise strategy, business performance goals, regulatory compliance, and the governance mechanisms themselves. That takes time, thick skin, and compromise. Things that are uncommon in the C-Suite – in combination or individually. Governance inevitably requires trade-offs.

Governance oversees decisions consequential to revenue. Decisions that affect a company’s customers, brand or market integrity, competitors, and legal situation. Effective governance requires understanding which objectives oppose one another – e.g. time-to-market versus regulatory compliance, profit margin versus product or service quality, short-term revenue versus long-term customer loyalty – and then to determine how to resolve them. These issues won’t be reconciled overnight. But absent governance, reconciliation gets shoved aside, and the risk of making catastrophic choices skyrockets. Without governance, deviant choices enter the decision space, and roam freely. Except they’re not called deviant, just choices. And sometimes, not even that.

World’s Most Ethical Companies® (WMEC’s). The Ethisphere Institute has developed a rating system to identify and honor companies that excel in: “(1) promoting ethical business standards and practices internally, (2) enabling managers and employees to make good choices, and (3) shaping future industry standards by introducing tomorrow’s best practices today . . . The information collected is not intended to cover all aspects of corporate governance, risk, sustainability, social responsibility, compliance or ethics, but rather it is a comprehensive sampling of definitive criteria of core competencies,” the Ethisphere Institute website states.

Ethisphere’s scoring system considers five factors, and assigns a weight:

Ethics and compliance program 35%
Corporate Citizenship and Responsibility 20%
Culture of Ethics 20%
Governance 15%
Leadership, Innovation, and Reputation 10%

Recently, Ethisphere discovered striking similarities in the ethics practices of the WMEC’s. High percentages of honorees used the following resources:

Code of conduct 95%
Compliance and Ethics Policies 95%
Misconduct reporting system 92%
Communication program 90%
Training curriculum or program 88%
Investigation process 88%
Organizational culture of ethics 82%
Risk assessment process 82%

Most telling, 61% of the WMEC honorees conduct annual reviews of these practices, versus 27% of non-honorees.

Clearly, not every company finds it worthwhile to invest in governance. Objections include:

1. Governance sounds too much like Government.
Rebuttal: none. This is a fair point.

2. Revenue killjoys remind them of the bratty kid who constantly tattled in elementary school.
Rebuttal: For sure. But every tattletale has, at least once, kept a prank from spinning hellishly out of control.

3. Governance can’t be achieved as a one-and-done – it’s ongoing.
Rebuttal: If you adhere to a management-by-magazine approach, this won’t be your thing.

4. There’s no “value add” for customers.
Rebuttal: Ask a VW owner if he or she agrees. “Without that expected fuel efficiency, VW owners of “clean diesel” vehicles will incur lost resale value as high as $5,000 per vehicle. Adding up all the cars affected, that puts the potential loss in the neighborhood of $55 billion.”

Dave Cote, Chairman and CEO of Honeywell, a 2013 WMEC Honoree, said there are three questions he never wants any Honeywell employee to have to face when discussing Honeywell with their family and friends: “Is it true?,” “Did you know?,” and “Have you ever done that?”

Those questions might be the ideal conversational opening for the average-looking person who offered to buy you a drink at the United Club. “Well . . . it’s a long story. But I’ve got time. My flight doesn’t leave for another nine hours . . .”

Announcing the 2015 Sales Ethics Hall of Shame

“Money doesn’t talk, it swears.” – Bob Dylan

When I need a burst of energy, I don’t reach for an espresso or Red Bull. I pick up a revenue plan. Any plan will do. Wanna dance? I know the Cash Flow Hustle!

Targets! Sales process! Profit margins! Lead generation! Capture rate! Conversion rate! Market share! When saying these words, watch for errant spittle flying off the tongue. It can’t be helped.

Ethical Governance deserves a special place in every revenue plan, but this dowdy topic doesn’t fit with the excitement. Many companies simply shove ethics into a metaphorical closet and then down the stairs. “Let Legal handle that.” Muffled banging, a distinct thud, and then the thrill of watching the revenue curve soar to the heavens, unencumbered, according to plan. “Guilt? We don’t use that word around here, Buddy.”

The party ends after an inopportune disclosure from an employee, or a journalist’s investigative report. Business poop hitting a whirling fan. What gets propelled through the other side sullies everything in its path. The myopic pursuit of the almighty dollar seldom ends up pretty.

That describes the 16 companies inducted into the 2015 Sales Ethics Hall of Shame. When I first made these awards in 2013, the inductees had to meet three standards:

1. The primary purpose of the enterprise couldn’t be selling an illegal product or service, like crystal meth or human trafficking.

2. More than one employee had to be involved in unethical activity. Scams involving a single, rogue employee did not qualify.

3. Any chicanery had to be repeatable and scalable—in other words, embedded in the company’s business process.

These standards apply to 2015’s award recipients as well, and all 16 inductees cleared each threshold, with room to spare.

Turing PharmaceuticalsHiking prices on Aunt Betty’s lifesaving medication by 5,500%.

This year, Turing’s CEO, Martin Shkreli made news by increasing the price of Turing’s Daraprim to $750 per tablet from the original price of $13.50. A change that instantly drove annual treatment costs for some patients into the six figures. “What is it that they are doing differently that has led to this dramatic increase?” Dr. Judith Aberg, the chief of the division of infectious diseases at the Icahn School of Medicine at Mount Sinai, asked rhetorically. She said the price increase meant hospitals might have to use “alternative therapies that may not have the same efficacy.” Translation: the price increase will kill some patients – literally.

Valeant Pharmaceuticals International / Philidor Rx Services LLCBad ethics infect a supply chain.

Valeant, and its retail partner Philidor had a cozy working relationship – too cozy for some. Valeant manufactures drugs, and Philidor distributes them, with Valeant as a sole-source provider. “Valeant’s critics say the flap shows some pharmaceutical companies have established or controlled pharmacies expressly to dispense their drugs and ensure reimbursement by insurers – sometimes through aggressive tactics that evade insurers’ efforts to control costs,” The Wall Street Journal reported on November 1, 2015.

Recently, “a short [stock] seller has accused [Valeant] of using Philidor in an accounting scheme, and former Philidor employees say Valeant staffers worked directly in the pharmacy’s offices, sometimes using fake names,” according to another Wall Street Journal article (Tough Sales Tactics Used at Philidor, October 29, 2015). None of this would be possible without good old infrastructure and documented business procedures for staff to follow. A Philidor training manual advised dropping a drug’s cost in $500 increments “until paid and then increase by $100 to get as close as possible to the max amount allowed by the insurance company,” the Journal reported.

Valeant’s revenue scheme with Philidor came to ignominious end on Friday, October 30th, when the three largest US pharmacy-benefit managers – CVS Health Corp, Express Scripts Holding Company, and United Health Group Inc.’s OptumRx – announced they were terminating all purchases from Philidor effective immediately. Valeant followed suit the next day, saying it was “ending all ties with Philidor.”

American Honda Finance Corporation: When Marketing loves minorities, but for all the wrong reasons.

In July, the US Department of Justice filed a complaint against American Honda Finance Corporation, alleging that the company’s dealers had overcharged minority customers, causing them to pay higher interest rates than white borrowers. Honda’s auto finance division agreed to pay a $24 million settlement to minority buyers, and to restructure the division.

Honda does not make direct loans to consumers. Instead, it authorizes dealers to mark up its loan rates up to 2.25%. But “regulators found rate discrimination within those mark-ups,” Assistant Attorney General Vanita Gupta said in an interview. The Justice Department and the Consumer Financial Protection Bureau began their investigation in 2013, and found that minority borrowers were paying $150 to $250 more than white borrowers. “The hope really is that Honda’s leadership is going to trigger the rest of industry to constrain dealer mark-ups and discriminatory pricing,” said Gupta.

Volkswagen“Clean Diesel” – marketing lipstick on an ethical pig.

When VW’s management decided to embed software for circumventing environmental regulations into the brains of its engines, it mass produced lying on an unprecedented scale. Eleven million vehicles are driving around with deceitful code, and now, we’ve just learned, not all of them are Volkswagens. The flagship brand Porsche just entered the scandal.

The case will be studied for years in business classes around the world as an example of a catastrophic junction of ethics and finance. $18 billion in potential fines. Billions of dollars pending in class-action lawsuits. 20% decline in VW’s stock price when news of the cheating scandal broke. Hospital and social costs estimated at $450 million. 30 Volkswagen managers directly implicated in the scandal. Massive worker cutbacks.

“I personally am deeply sorry that we have broken the trust of our customers and the public,” Volkswagen’s former CEO, Martin Winterkorn, said after the news of the scandal broke. His contrition appears to be lipstick on a pay-plan pig. Winterkorn’s pension from his former employer will be around $32 million.

General MotorsWhen fixing a fatal product flaw cuts into profit margins.

“They let the public down. They didn’t tell the truth in the best way that they should have — to the regulators, to the public — about this serious safety issue that risked life and limb,” said US Attorney Preet Bharara. The product flaw – ignition switches that unintentionally slip from the “run” position, cutting power to the engine – has been implicated in at least 169 deaths. GM has spent more than $5.3 billion “on a problem authorities say could have been handled for less than a dollar per car. Those expenses include fines, compensation for victims and the recall of millions of vehicles,” according to the Oneida Daily Dispatch.

There was evidence that GM knew about the faulty engineering for over ten years, but chose to conceal the defect from the government and the public. “We understand that lives were impacted. That is something that we understand and we take forward and will have with us every day,” GM’s CEO, Mary Barra said. But her circumspection won’t take place in prison. As part of the deal with government prosecutors, no GM employees will go to jail.

“If a person kills someone because he decided to drive drunk, he will go to jail,” said Laura Christian, the mother of a woman who died in her 2005 Cobalt. Yet GM employees “are able to hide behind a corporation because our laws are insufficient. It must change.”

TakataStuffing ten pounds of product defects into a five pound airbag.

Defective Takata airbags have been attributed to at least 139 injuries across all automakers. Two people have died from faulty Takata airbags in Honda vehicles, Takata’s largest customer. Approximately 34 million vehicles of all makes have installed Takata airbags that are potentially defective. Takata’s airbag inflators can explode, causing shrapnel to shoot into auto cabins.

On November 3rd, US regulators assessed Takata a $70 million fine, and ordered the company to stop using ammonium nitrite-based propellants in their products. In 2014, The New York Times published a report “suggesting that Takata knew about the airbag issues in 2004, conducting secret tests off work hours to verify the problem. The results confirmed major issues with the inflators, and engineers quickly began researching a solution. But instead of notifying federal safety regulators and moving forward with fixes, Takata executives ordered its engineers to destroy the data and dispose of the physical evidence. This occurred a full four years before Takata publicly acknowledged the problem,” Car and Driver reported on October 26, 2015 (Massive Takata Airbag Recall: Everything You Need to Know, Including Full List of Affected Vehicles).

“’We deeply regret the circumstances that led to this,’ said Takata Chief Executive Shigehisa Takada, adding that the company is ‘committed to being part of the solution,’” The Wall Street JournalReported on November 4th (Honda Adds to Mounting Woes at Takata). On November 3rd, the same day that US regulators announced the $70 million fine, Honda said it “will no longer use Takata Corporation front driver or passenger air-bag inflaters in new vehicles under development,” alleging Takata misrepresented or manipulated test data.

Coca ColaUsing “scientific research” to “inform” the debate about obesity.

In the last 20 years, consumption of full-calorie sodas in the US has declined 25%. Coca Cola wanted to stem the tide with “science.” “Most of the focus in the popular media and in the scientific press is, ‘Oh they’re eating too much, eating too much, eating too much’ — blaming fast food, blaming sugary drinks and so on,” said the vice president of the Global Energy Balance Network, Steven N. Blair, adding, “and there’s really virtually no compelling evidence that that, in fact, is the cause.” Coca Cola provides Blair’s organization financial and logistical support.

Health experts objected to Blair’s assertions, saying they are “misleading and part of an effort by Coke to deflect criticism about the role sugary drinks have played in the spread of obesity and Type 2 diabetes. They contend that the company is using the new group to convince the public that physical activity can offset a bad diet despite evidence that exercise has only minimal impact on weight compared with what people consume,” according to an article in The New York Times (Coca Cola Funds Scientists Who Shift Blame for Obesity away from Bad Diets).

Coca Cola heard the health community’s response loud and clear. In a Wall Street Journal editorial published August 19 titled, We’ll Do Better, Coca Cola CEO Muhtar Kent wrote,

“I am disappointed that some actions we have taken to fund scientific research and health and well-being programs have served only to create more confusion and mistrust. I know our company can do a better job engaging both the public-health and scientific communities—and we will. By supporting research and nonprofit organizations, we seek to foster more science-based knowledge to better inform the debate about how best to deal with the obesity epidemic. We have never attempted to hide that. However, in the future we will act with even more transparency as we refocus our investments and our efforts on well-being.”

Axact Corporation College degrees provide wealth . . . to the faux institutions that issue them.

Online access to education has provided opportunities to millions of people to earn college degrees. It also provides opportunities for unscrupulous scam artists who operate from behind of smokescreen of proxy Internet services and weak international regulations, particularly in Pakistan, the home country of Axact Corporation.

“At Axact’s headquarters, former employees say, telephone sales agents work in shifts around the clock. Sometimes they cater to customers who clearly understand that they are buying a shady instant degree for money. But often the agents manipulate those seeking a real education, pushing them to enroll for coursework that never materializes, or assuring them that their life experiences are enough to earn them a diploma. To boost profits, the sales agents often follow up with elaborate ruses, including impersonating American government officials, to persuade customers to buy expensive certifications or authentication documents. Revenues, estimated by former employees and fraud experts at several million dollars per month, are cycled through a network of offshore companies,” according to an article in The New York Times (Fake Diplomas, Real Cash: Pakistani Company Axact Reaps Millions).

In late May, Axact’s CEO, Shoaib Ahmed Shaikh, and four others were arrested in Pakistan, and charged with fraud, forgery and illegal electronic money transfers, money laundering, and violating Pakistan’s electronic crimes act.

Peanut Corporation of America (PCA)Neither mold, nor cockroaches, nor salmonella will delay this company’s deliveries. 

Peanut Corporation’s products were involved in a two-year salmonella outbreak from 2007 to 2009. In 2015, Stewart Parnell, former CEO of PCA, was sentenced to 28 years, the most severe punishment ever meted to an executive of a food company for a safety issue. The Center for Disease Control estimates around 700 PCA-related cases were reported, including nine deaths in 46 states. Possibly thousands of people were harmed.

Parnell wasn’t guilty of lax oversight and poor quality control. This scandal resulted from the fact that his company knowingly shipping tainted food. After discovering that a shipment might get delayed because of lab results that indicated the presence of salmonella, Parnell wrote, “s***, just ship it,” according to The Wall Street Journal. Parnell was also accused of falsifying lab reports.

“I cannot afford to loose [sic] another customer,” he wrote in a statement that should not be confused with customer-centricity.

M.C. Dean and Hilton Hotels. You can get a wireless connection – but not before you give up your credit card number.

“Consumers are tired of being taken advantage of by hotels and convention centers that block their personal WiFi connections,” said Travis LeBlanc, chief of the FCC’s Enforcement Bureau. “This disturbing practice must come to an end. It is patently unlawful for any company to maliciously block FCC-approved WiFi connections.” The FCC began investigating M. C. Dean in 2014 after it received complaints that the company was blocking wireless Internet access for guests at the Baltimore Convention Center, where the company is the sole Internet provider. M. C. Dean admitted to obstructing hotspots using auto-block mode on its WiFi system, engadget.com reported on November 4th. “The company was charged with violating the FCC’s Communications Act by maliciously interfering with or causing interference to lawful WiFi Hotspots.” The FCC has fined company $718,000.

Hilton has been fined $25,000 for failing to cooperate with an FCC investigation into similar efforts to block WiFi access at its properties.

Wells Fargo: What happens when a company insists on its sales force making quota, but doesn’t care how they do it.

This summer, The Los Angeles City Attorney, Mike Feuer, sued Wells Fargo on behalf of the city. The suit states, “. . . Wells Fargo’s business model imposed unrealistic sales quotas that, among other things, have driven employees to engage in unlawful activity including opening fee-generating customer accounts and adding unwanted secondary accounts to primary accounts without permission. These practices allegedly have led to significant hardship and financial loss to consumers, including having money withdrawn from customer’s authorized accounts to pay for fees assessed by Wells Fargo on unauthorized accounts and derogatory notes on credit reports when unauthorized fees went unpaid, causing some customers to purchase identity theft protection.” The complaint further alleges that Wells Fargo failed to properly inform customers of misuse of their personal information and failed to refund unauthorized fees,” according to a press release from Feuer’s office.

A judge dismissed the lawsuit, but the City has appealed. In September, the City of Oakland, California, filed a related suit against Wells Fargo, accusing the company of “steering minorities into high-cost mortgage loans that allegedly led to foreclosures, abandoned properties and neighborhood blight,” according to Reuters.

“African-American borrowers in Oakland were 2.4 times more likely to receive a predatory loan than comparable white borrowers. Hispanic borrowers were 2.5 times more likely to receive a predatory loan. Loans in minority neighborhoods were 4.75 times more likely to end in foreclosure. The disproportionate number of foreclosures among minorities would not have happened if [Wells Fargo] applied uniform lending practices,” the lawsuit said.

Access Funding: Why let mental impairment jeopardize a profitable deal? 

To critics, “Access Funding is part of an industry that profits off the poor and disabled. And Baltimore has become a prime target. It’s here that one teen — diagnosed with ‘mild mental retardation,’ court records show — sold her [structured settlement] payments [to Access] through 2030 in four deals and is now homeless. It’s here that companies blanket certain neighborhoods in advertisements, searching for a potentially lucrative type of inhabitant, according to the Washington Post (How Companies Make Millions of Lead-poisoned, Poor Blacks, August 25, 2015).

Access Funding and other companies have found gaps in the legal protections offered to victims of lead poisoning, allowing them to buy structured settlements for pennies on the dollar. “Over the past two decades, state legislatures and the U.S. Congress have passed measures to protect vulnerable people selling structured settlements. In 2000, Maryland inked the Structured Settlement Protection Act, which enumerated a series of requirements. First, a seller must seek the counsel of an independent professional adviser. Then the proposed deal must go before a county judge, who decides whether that agreement reflects the seller’s best interests,” according to the Post article.

“There are weaknesses and ways people can circumvent it,” said Eric Vaughn, Executive Director of the National Structured Settlements Trade Association. “And these companies are getting around the intents of the law. . . . And when that happens, people get hammered.”

Medtronic: M-E-D-I-C-A-R-E: another way to spell revenue.

A former Medtronic sales rep, Jason Nickell of Austin, Texas, alleged in a whistleblower lawsuit that the company promoted off-label use of a neurostimulation device. He made as much as $600,000 per year selling it. The suit states, “Medtronic sales staff was directed to promote the off-label procedure by selling the neuromodulation device at steep discounts to pain management doctors and by promising those physicians that they could ‘make upward of $10,000 profit on each patient, while adding only minutes to the procedure,’” according to an article in the Star Tribune (Medtronic to pay $2.8 million to Settle Off-label Promotion Charges, February 7, 2015). Nickell quit his job “over concerns about the way that Medtronic devices were being promoted for an investigational procedure known as subcutaneous stimulation, Sub-Q or subcutaneous peripheral nerve field stimulation,” according to the suit.

Under the terms of Medtronic’s agreement with the US government, the company will pay $2.8 million in fines, in exchange for dismissal of criminal charges, and no obligation to admit liability. “Medtronic is committed to following appropriate marketing and reimbursement practices at all times, and for many years has had in place a comprehensive and robust employee compliance program,” the company said in the statement.

The US government interpreted the company’s actions differently. “Medtronic’s scheme,” as the government described it, turned many doctors “from dispassionate medical professionals … into retail salesmen pushing ‘snake oil’ because of large profits.”

Office Depot: A price commitment that’s worth less than the paper it’s printed on.

In January, the law firm Philips and Cohen reported that “more than 1,000 cities, counties, school districts and other government entities in California – including Los Angeles and Santa Clara County – will share in a $68.5 million settlement paid by Office Depot for allegedly overcharging them for office supplies. The case was initiated by a former Office Depot employee, David Sherwin, in a whistleblower lawsuit.

“Participants in the contract are guaranteed to receive Office Depot’s best available prices for government purchasers, according to Sherwin’s complaint. But Office Depot allegedly gave Los Angeles, Santa Clara and the other California entities that are part of the settlement a lower discount rate than other government entities were given,” according to Philips and Cohen. The case alleged that “Office Depot failed to give most of its California government customers the lowest price it was offering any government customer as required under its contracts.” Other pricing misconduct also was alleged.

“David Sherwin’s insider knowledge and his determination to do the right thing were the most important factors in bringing Office Depot’s alleged misconduct to light,” said Stephen Hasegawa, a San Francisco attorney who represented Sherwin. “He worked tirelessly on his own and with his lawyers for several years to try to prove Office Depot had overcharged its government customers.”

Formosa Plastics: When quality control measurements don’t conform to industry standards, make them up.

On April 4th, Formosa Plastics agreed to pay $22.5 million “to settle its liability in a whistleblower lawsuit involving PVC pipe manufactured by a former subsidiary, JM Eagle, under the terms of a settlement agreement approved by a federal judge. The settlement by Formosa Plastics doesn’t cover JM Eagle’s liability. The lawsuit alleges that JM Eagle ‘falsely represented to its customers . . . that the PVC pipe products sold to them conformed to applicable industry standards when in fact the products were made using inferior materials, processing, and tooling that resulted in their having substandard tensile strength, as measured by various tests,’” according to PRNewsire (Formosa Plastics Agrees to Pay $22.5 million to Settle Its Liability in Whistleblower Case That Former Subsidiary JM Eagle Lost at Trial) 

It’s impossible to read about these appalling ethical choices without recognizing disturbing patterns. All were heartless and deliberate. Most created human calamity, including death, personal injury, job and financial losses. All exploited information power. All depended on legal loopholes, regulatory gaps, or lax enforcement. All caused incalculable financial losses. All resulted from persistent chains of unethical choices – not from a single bad decision. Most infected more than one company.

These patterns can be broken when Ethical Sales Governance gets wedged into every company’s revenue plan. I propose putting it in between Sales Process and Lead Generation, so it won’t be missed. Jazz up the title by calling it Optimized Ethical Sales Governance – that way, people will read it. Then, pack the section full of content, including Corporate Responsibility, a Code of Business Conduct, Ethics Monitoring and Assessment, Reporting Violations, Compliance, and Ongoing Ethics Training and Development.

My reasons for making these recommendations are entirely self-serving: I want fewer candidates to cull when I make my choices for 2016.

A Contrarian View of Transparency

In March, 2014, StubHub announced a novel “all in” pricing policy that displayed online ticket prices inclusive of add-on fees and other service charges. The company was responding to consumer research “showing that fans hate nothing more than to see their final ticket price jacked up with additional fees and service charges when they reach checkout,” according to a Wall Street Journal article (The Truth? Customers Don’t want to Hear It, March 26, 2014). Good move. Give customers what they want. Nothing wrong with that!

But then something unexpected happened: StubHub sales dropped as fans began to buy from sites that listed lower base prices. Ticket brokers who bought from StubHub reported that sales declined by 15% to 50% since the new pricing policy was implemented. In case you haven’t bought a concert ticket lately, ancillary fees can escalate the final cost by as much as 50% of the list price that draws in online shoppers. The Wall Street Journal article cited a $400 Justin Timberlake ticket on VividSeats.com in which the company assessed a $199.50 service charge.  “But wait! There’s more!” – the sales cliche applies to the final price that consumers pay, too.

Processed food brand managers can relate to the conflicts that occur when there’s dissonance between what customers say they want and what they really want. “When you tell people something’s healthy, they think it doesn’t taste good,” said Sarah Bittorf, Chief Brand Officer of Boston Market. General Mills recently cut the per-serving amount of sodium by up to 50% in more than 27 varieties of Hamburger Helper. They jazzed up the product by adding other strong flavors like garlic, onion, tomato, and spices. “But the company was careful not to tell consumers about the sodium cuts,” according to another Wall Street Journal article, Food Makers Move Gingerly on Changes (June 24, 2014). There’s a pattern: indiscriminate transparency can put the brakes on sales.

Not long ago, transparency did not require qualification. Something was either transparent, or not. Today, many writers must hedge their use of the word transparency with an adjective. Partial transparency? That sounds weird. Selective transparency? The same! Using adjectives for transparency opens a can of un-tasty sales worms. Business developers would rather believe that unprecedented “customer information power” enables honest, socially-responsible enterprises to vanquish unscrupulous companies that pull the wool over their customers’ eyes, or manipulate what they can see.

In fact, the ideal of a fully-transparent enterprise is Pollyanna. Consider the challenges surrounding corporate transparency about data breaches. “There is this crazy hysteria” about cyber-attacks, said Dawn-Marie Hutchinson, head of information security for Urban Outfitters. In August, 2014, The Wall Street Journal reported that some executives “argue that many breaches don’t lead to harm and can be handled quietly. Not every corporate document is a valuable trade secret; credit-card numbers may be exposed but never stolen, or stolen but never used. Disclosure can cause its own problems, prompting consumers to waste time replacing credit cards, for example. Most seriously, they say, going public could expose weaknesses that others could exploit.” Transparency: Damned if we do, damned if we don’t.

Compared to sales of concert tickets and hamburger supplements, transparency about information breaches scares the bejeebers out of legislators, and has garnered great regulatory interest. Only three states – Alabama, New Mexico, and South Dakota – do not have a data breach notification law, exposing a loophole the size of Alaska. “We actually don’t use the term breach,” Ms. Hutchinson said, because that could trigger disclosure laws,” according to The Wall Street Journal. Clever.

Many executives huff that honesty and transparency are among the core ideals their companies and employees have embraced.  But the act of being transparent is hardly straightforward.

Do customers always benefit when companies are open and honest? Do consumers persistently perceive corporate transparency in positive ways? If not, how should companies define ethical boundaries when it comes to disclosure – about anything? These questions undermine assumptions that corporate transparency, customer-centricity, and shareholder value all play together nicely in the same sandbox. They don’t. More transparency doesn’t always benefit customers, and it does not always yield better outcomes.

Sales Governance and Compliance: It Takes a Village

Two hundred and thirty-six years. That’s the cumulative amount of prison time that Bernie Madoff, Dennis Kozlowski, Bernard Ebbers, Kevin Trudeau, Jeffrey Skilling, and Walter Forbes were sentenced to serve for criminal fraud. The shortest sentence was 10 years—sufficient time to practice yoga while chanting Om Namah Shivaaya, or Woulda Coulda Shoulda – whichever comes to mind.

We know how amorality spreads when a senior executive meanders onto the ethical low road. “A fish begins rotting at the head,” as people commonly describe the infectious chain reaction.

But a fish can begin rotting anywhere. This month The Economist reported that 70% of companies surveyed were affected by fraud in 2013, up from 61% in the previous year. If you’re curious to explore the sociology behind this trend, save yourself the time. Willie Sutton, the notorious robber, provided a terse, but insightful summation when asked why he chose banks as his preferred target: “Because that’s where the money is.”

Most fraud never gets reported. Some readers might remember Travis Doe, the pseudonym for a former sales co-worker, who I wrote about in a 2007 article, On My Honor as a Salesperson: Why Sales Ethics Matter. Travis scammed his company and its customers, until he inadvertently blew his cover. He didn’t bag as much cash as these convicts, and he didn’t go to jail. Instead, Travis was quietly fired, and he slithered off into oblivion, until resurfacing—on LinkedIn, of all places! I recently stalked his profile page, and wasn’t surprised to discover that he didn’t use Thief for any of his various job titles, nor did he list the company he scammed as one of his employers. Don’t ask, don’t tell.

Thinking like a fraudster will help prevent fraud. Let’s look through Travis’s eyes at the conditions he found ripe for exploitation:

1. High financial rewards for fraud. Travis funneled customer orders through a shell reseller company he maintained. Resellers received a price discount of 40%, and Travis reaped 100% of the margin.

2. Sales compensation skewed heavily toward rewarding revenue achievement. Travis knew that as long as he made his number, he could operate without tripping any alarms.

3. Lax internal audit controls and ineffective transaction monitoring. No one sought explanations about the “Reseller’s” business offering, or why a company was allowed a reseller discount when it had no resources, and no capacity to add value.

4. Siloed business operations. Travis reported through the reseller channel, and his activities were not scrutinized by direct sales management.

5. Remote monitoring without control. Activity reports were sent to managers working in remote offices.

The growing rate of corporate fraud should remind executives that Travis Doe was no low-probability, rogue employee outlier. There are plenty more Travises, many lurking behind cleanly-scrubbed LinkedIn profiles. And if Travis Doe had complicit parties to his fraud, it was his tone-deaf managers who had their heads immersed in sand. They tacitly allowed Travis to take full advantage of them. With effective sales governance and compliance procedures in place, Travis might have had to move on to find a different company from which to steal.

There are ten hallmarks for effective governance and compliance programs, adapted from US Department of Justice guidelines designed to help companies comply with the Foreign Corrupt Practices Act.

1. Commitment from senior management. Top management must model the right behaviors if they expect others to behave similarly.
2. Documented code of conduct, and unambiguous compliance policies.
3. Oversight autonomy and resources. It takes a village—the oversight team must work without pressure for making revenue goals, and must be allowed sufficient time and power for investigation.
4. Ongoing risk assessment. Risk exposure for sales fraud changes as people, processes, and technologies change.
5. Training and continuing advice for employees. As one attorney told me, “companies that breach regulations have better cases if they can prove they have provided employees ongoing training about ethical and legal obligations and boundaries.”
6. Incentives and disciplinary procedures. Employees must be motivated to blow the whistle, and the consequences for non-compliant activity must be enforced.
7. Due diligence for business practices of third-party resellers and channel partners. Vetting and monitoring reseller sales practices is as important as ensuring compliance for internal practices.
8. Confidential reporting and internal investigation. The ability to expose the truth requires assurances for anonymity.
9. Continuous improvement, testing and review.
10. Mergers and acquisitions: pre-acquisition due diligence and post-acquisition integration.
Legal and ethical governance and compliance have evolved into significant issues for companies engaged in global sales. And tactics around revenue generation have percolated into almost every area that leaders must address, including cybercrime, money laundering, China’s bribery crackdown, and trade sanctions. Companies that educate their sales and marketing staffs about these issues and others will be better prepared for the challenges, and can avoid onerous legal penalties.

Organizations that implement a sales governance and compliance program should not expect to drive fraud risk to zero. As The Economist reported, “fraud within companies is a risk that can never be eliminated, just managed.”

Further reading: The Dow Jones Global Compliance Symposium, April 22-23, 2014, Washington, DC.

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