UK businesses need to be aware of the growing importance given to corporate culture by regulators on both sides of the Atlantic.
In a recent speech that garnered much attention, U.S. Deputy Attorney General Lisa Monaco highlighted several significant changes in how the U.S. Department of Justice (DOJ) will prosecute corporate crime during the Biden administration. (Read the detailed article by Latham Customer alert analyzing the discourse and its potential impact, and the blog post highlighting issues of particular relevance to UK DFCs.)
This article highlights the DOJ’s particular emphasis on the importance of “corporate culture”.
Corporate culture: not a new concept
The UK’s Financial Conduct Authority (FCA) has long been a flagship of culture and conduct, having issued many targeted initiatives and statements in recent years, such as the Senior Managers & Certification Regime program and 5 Conduct Questions. The FCA is very clear that the focus on culture is “permanent and ongoing” and that it expects all regulated businesses to monitor the cultural direction of their travel. This position results from the FCA’s view that most (if not all) of the recent major prudential or conduct failures in financial institutions shared the common characteristics of underlying cultural failures as an important root cause. Indeed, findings of serious cultural gaps underpin a number of recent enforcement cases.
The DOJ (like other US regulators) has not been silent on the issue of culture. The DOJ has emphasized the importance of a “culture of ethics and compliance” in its existing guidelines on the assessment of corporate compliance programs (April 2019) and has set out detailed questions that prosecutors should ask when assessing corporate compliance programs. The Justice Department’s guidelines stress the need for “high-level engagement from company executives”, including the board of directors and executives, and assert that company executives “do evidence of rigorous adherence by example ”. The guidelines ask prosecutors to ask how senior leaders “by their words and actions have encouraged or discouraged compliance,” what “concrete actions have they taken to demonstrate leadership in corporate compliance” and ” how they gave appropriate behavior to their subordinates ”. In addition, the guidelines emphasized not only the importance of culture in general, but also how and how often “the company measures his culture ….”. And, “[w]What actions has the company taken in response to its compliance culture measurement? “.
Speech by the Deputy Attorney General of Monaco – which referred to culture six times – can demonstrate a renewed commitment to focus on the corporate culture and whether a deficient corporate culture allowed the misconduct to occur or, conversely, whether the misconduct occurred despite the engagement of the company towards a corporate culture of compliance. While acknowledging that running a large organization and establishing the right culture requires resources and effort, the Deputy Attorney General of Monaco noted that “corporate culture matters” and that a culture of a business that “does not hold individuals accountable, or invest in compliance – or worse, mocks compliance – leads to poor results.” She noted that companies serve their shareholders by proactively implementing compliance functions and spending resources to anticipate issues.
She also assured companies that they will receive government credit if such proactive procedures are put in place. Conversely, the DOJ “will ensure that the absence of such programs inevitably turns out to be a costly omission for companies that end up being subject to [DOJ] surveys ”. She said DOJ saw himself as having a “responsibility … to encourage responsible corporate citizenship. [and] a culture of compliance ”. She referred to the culture of a company in the context of the DOJ evaluating all previous faults in making prosecution decisions and in the context of how the DOJ will view the imposition of corporate auditors – c That is, can the DOJ trust a company to “self-control” and “change its corporate culture” or should the DOJ impose an independent auditor?
While UK businesses, especially those subject to FCA rule, know culture is in the spotlight, this speech highlights the growing transatlantic focus on culture – and the environment, the social and governance (ESG). To help clients create a positive culture of compliance and accountability, Latham & Watkins recently released the third edition of Culture – A practical framework for lasting change, a one-of-a-kind framework that builds on the firm’s experience over the past decade advising institutions on their culture and conduct change initiatives, as well as other culturally rooted issues. The framework aims to bridge the gap between theory and practice by outlining a range of practical steps and techniques that companies can adopt in their quest to institute a meaningful, objectively controllable, and operational culture change program.