UK companies should be aware of the increasing focus on corporate culture by regulators on both sides of the Atlantic.
By Nathan H. Seltzer, David Berman, Stuart Alford QC, Christopher M. Ting, and Nell Perks
In a recent speech that has garnered significant attention, US Deputy Attorney General Lisa Monaco highlighted several important changes in how the US Department of Justice (DOJ) will pursue corporate crime during the Biden Administration. (Read Latham’s in-depth Client Alert analysing the speech and its potential impact, and Latham’s blog post highlighting matters of particular relevance to UK PLCs.)
This post highlights the DOJ’s particular emphasis on the importance of “corporate culture”.
Corporate culture: not a new concept
The UK Financial Conduct Authority (FCA) has long been a standard-bearer for culture and conduct, having issued numerous targeted initiatives and pronouncements over recent years, such as the Senior Managers & Certification Regime and 5 Conduct Questions programme. The FCA is very clear that its focus on culture is “permanent and continuing” and that it expects all regulated firms are monitoring their cultural direction of travel. This position is a result of the FCA’s view that most (if not all) recent major prudential or conduct failings within financial institutions shared the common characteristics of underlying cultural failings as a significant root cause. Indeed, findings of serious cultural shortcomings 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 emphasised the importance of a “culture of ethics and compliance” in its existing guidance on the Evaluation of Corporate Compliance Programs (April 2019) and set out detailed questions prosecutors should ask when evaluating corporate compliance programmes. The DOJ’s guidance emphasises the need for “a high-level commitment by company leadership”, including the board and executives, and says corporate leaders “demonstrate rigorous adherence by example”. The guidance directs prosecutors to ask how senior leaders “through their words and actions, encouraged or discouraged compliance”, what “concrete actions have they taken to demonstrate leadership in the company’s compliance”, and “how they have modelled proper behavior to subordinates”. In addition, the guidance highlighted not only the importance of culture generally, but how and how often “the company measures its culture ….”. And, “[w]hat steps has the company taken in response to its measurement of the compliance culture?”.
Deputy Attorney General Monaco’s speech — which referenced culture six times — may demonstrate a renewed commitment to focusing on corporate culture and whether a deficient corporate culture allowed the misconduct to occur or, by contrast, whether the misconduct occurred despite the company’s commitment to a corporate culture of compliance. While acknowledging that managing a large organisation and establishing the right culture requires resources and effort, Deputy Attorney General Monaco indicated that “corporate culture matters” and that a corporate culture that “fails to hold individuals accountable, or fails to invest in compliance — or worse, thumbs its nose at compliance — leads to bad results”. She noted that companies serve their shareholders by proactively implementing compliance functions and spending resources to anticipate problems.
She also assured companies that they will receive credit from the government if such proactive procedures are put in place. Conversely, DOJ will “ensure the absence of such programs inevitably proves a costly omission for companies who end up the focus of [DOJ] investigations”. She stated that DOJ views itself as having the “responsibility … to incentivize responsible corporate citizenship [and] a culture of compliance”. She referenced a company’s culture in the context of DOJ evaluating all prior misconduct in making charging decisions and in the context of how DOJ will consider the imposition of corporate monitors — that is, can the DOJ trust a company to “self-police” and “change its corporate culture” or does the DOJ need to impose an independent monitor?
While UK companies, particularly those subject to FCA authority, have known culture is in the spotlight, this speech highlights the growing transatlantic emphasis on culture — and environmental, social, and governance (ESG). To help clients build a positive culture of compliance and accountability, Latham & Watkins recently published the third edition of Culture — A Practical Framework for Sustainable Change, a first-of-its-kind framework that draws on the firm’s experience over the past decade advising institutions on their culture change and conduct initiatives, as well as other culturally rooted issues. The framework seeks to bridge the theory-practice divide by outlining an array of practical measures and techniques that companies can adopt in their quest to institute a meaningful, objectively monitorable, and operationally workable culture change programme.
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