Sales Governance and Compliance: It Takes a Village


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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.

Republished with author's permission from original post.


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