Tyco Enhances Its Compliance Program - Helped By Convergence Efficiencies

Monday, October 1, 2007 - 00:00

The Editor interviews Matthew O. Tanzer, Vice-President and Chief Counsel - Compliance and Regulatory Affairs and Enrique Aznar, Deputy General Counsel & Chief Compliance Officer Europe, Middle East & Africa (EMEA), Tyco International (US) Inc.("Tyco").

Editor: Matt, please describe Tyco.

Tanzer: Tyco is today about an $18 billion company, in terms of revenues; prior to our spin-off we were about $42 billion. We are roughly about half of the size we were, yet we still do business in more than sixty countries. In fact, more than half of our 110,000 employees are outside the United States. We have a very broad footprint around the world.

Editor: What is your role within Tyco's compliance structure?

Tanzer: As VP and Chief Counsel for Compliance, I have direct responsibility for running the corporate compliance program. I report to Judy Reinsdorf, Executive Vice President and General Counsel, who is also the Chief Compliance Officer for the company. Thus, the compliance function reports up through legal. The General Counsel reports to the CEO.

Editor: Tell us about the team reporting to you.

Tanzer: We have a very global compliance team. We have a number of specialty lawyers that handle various matters like international trade, environment, health and safety, and government contracts. We also have a Professional Training Director who coordinates all our training activities around the world.

The Ombudsman and Assistant Ombudsman are part of the team and handle calls and emails relating to concerns raised by employees and others. The Ombudsman officially reports to the Audit Committee of the board. This is important in that it gives her a direct line of communication to our board.On a day-to-day basis she reports to me. We have a very active ConcernLine, which is what we call our hotline for reporting concerns, and we encourage its use globally.

Internationally we have regional compliance lawyers, of which Enrique is one. We have a regional compliance lawyer in Europe (Enrique), a regional compliance lawyer in Asia, a regional compliance lawyer in Latin America, and we have a regional compliance professional in Australia/New Zealand. So we have global coverage, and it is very much a global team that works on promoting compliance throughout the company. We are not very U.S.-centric.

Editor: How do you decide what in the way of resources should be allocated to compliance?

Aznar: We are very dispersed as well as being a very large global organization. It is always a challenge to cover every area of the globe where we do business with the team we have and even though we have a good team, we do have to prioritize. How do we prioritize? We try to do some level of risk assessment and use it as a way to gauge compliance risk to the company. We know from experience the types of issues we face and the challenges we face, so we put our resources into addressing those specific types of compliance issues. We also use indicators such as the Transparency International Corruption Perception Index to determine what countries may need more legal attention. Whether it's an anti-trust issue or a FCPA issue or an import/export issue - whatever it may be - we use our experience and some level of risk assessment to focus our resources there. We do a significant amount of proactive work like training and messaging to try to head off any potential problems.

Editor: How do you measure how well Tyco is doing in compliance around the world?

Tanzer : We have a variety of measurement tools; for example, we have regular training programs that are both provided online via the Internet as well as in person and look at the number of training modules completed, and the number of employees trained. Every year our employees sign and certify to abide by what we call our "Guide to Ethical Conduct," which is really our code of conduct, and we track employee participation in that process. We look at the number of new matters and investigations that we may open up. We measure the number of calls to our ConcernLine and the types of issues that are raised. We have considered some other measurements but they are not yet formally in place; things like how many third parties are we using and extent to which our relationship with them has been subjected to due diligence. We have looked at the riskiest countries in which we do business and then evaluated how much government revenue we have in those countries. There are some other measurements that we have considered, but that gives you a broad overview of the types of things we look at. We measure and track all of this and more and the information goes to the board annually for review.

Editor: I understand that before Tyco began to look for law firm resources for its EMEA legal and compliance efforts, it restructured its internal legal team in Europe, the Middle East, and Africa.

Aznar: In 2005, the Vice President and General Counsel for Europe, the Middle East, and Africa - Trevor Faure - and his two deputy general counsels - David Symonds and myself - worked with our U.S. colleagues to develop a new legal model to deal with the legal needs of a big and complex multinational conglomerate. We had looked at a whole range of models but did not find one that completely suited our needs, so we developed our own model. This model is known as "SMARTER," which stands for Segment and Subject Management, Regional Teams and External Resources. The Segment and Subject Management part is carried out by Trevor, David, our Chief Administration Officer, Ros Ben-Shabat, and me. We each manage our respective Segments or Subject matter areas, like in my case, compliance.

The Regional Teams consist of the senior regional counsel assigned to their respective regions of the world and local legal specialists. They handle legal matters pertaining to their regions and report to the Management Team. They also provide the local law and language expertise across their Segments.

Finally, our External Resources consist of a single firm, Eversheds, which was appointed as the sole legal advisor for day-to-day legal matters in the EMEA region. These external resources include dedicated Eversheds lawyers who are working full-time for Tyco in countries like the United Kingdom, France, Germany, Italy, the Middle East, Benelux, and South Africa and they are linked to the regional teams. They report to senior regional counsel in every region.

There are three components in the legal model in our region: the management team, the regional counsel and the external resources. This structure allows us to improve compliance because we can now offer close assistance to the business and immediate legal advice and support in the local language. This structure, by enabling us to provide an appropriate and rapid response, helps us to prevent incidents involving a possible violation. Also, all the lawyers in this model, including the external lawyers that work full-time for us, act as de facto compliance officers in their territory. They provide advice on anti-bribery, competition law, data protection, as well as on day-to-day employment law, contract or commercial issues.

Editor: Enrique, please drill down and describe the structure in your region - the EMEA region which comprises 35 different countries?

Aznar: We divided the EMEA region into seven territories. For example, the Southern European territory consists of Spain, Portugal, Italy, Greece, Israel and the Middle East. We have one Tyco lawyer responsible for all the legal matters in that territory. In that territory, we also have two full time lawyers from Eversheds. One is in the Middle East and the other is in Italy. This provides us with full coverage from both a legal and from a compliance perspective because we have trained the whole team, including the full time equivalents from Eversheds, on compliance matters. For example, this week we are having training on combating bribery in the Middle East in the local language.

Editor: I gather that Tyco ran a RFP process to select law firms to work with Tyco in the EMEA?

Aznar: After a reasonably long RFP process involving a number of law firms, we found that Eversheds was the most suitable candidate based on the five selection criteria that we employed. One was "coverage" - countries in which the firm operated or had an affiliate that was sound and part of its network. Another was "efficiency of service" - the availability of individuals to work full time for us. Also, we looked for firms that offered appropriate "fee structures" - structures that were interesting in connection with this project. "Business comprehension and integration" - how well the firm was able to understand the complexity of a multinational conglomerate like Tyco was another consideration. "Diversity" was another one. "Relevant experience" - working with similar companies was still another. From our conversations with the firms involved in this process, no other company has converged from 280 law firms to one as part of a comprehensive restructuring of their legal department.

There was a lot of engineering put behind this model. We are convinced that we are doing the right thing, and this is being confirmed by our internal Client Satisfaction Surveys that show that our internal business clients are now more satisfied with the level of legal services that they are receiving under the SMARTER model.

It has significant advantages. For example, increased subject-matter and geographical coverage is one. If you are advising a region from your headquarters, it is difficult to provide clients with the type of legal advice that is needed. We want our lawyers to be partners in the business and to be part of the culture of the local people. We want them to be sought out for advice when needed, and the only way you can do it is to have the right people in the right place, either internal lawyers or external partners that work as in-house lawyers.

The smooth way in which the Eversheds' lawyers work with our business people and lawyers improves the quality of the work. We talk once a week with the entire legal group, including the Eversheds' lawyers, so there is constant monitoring by the Management Team of the work of the regional counsels and the full time equivalents from Eversheds. There has not only been an improvement in quality and response time, there is also better control - control not only with regards to the legal or compliance matters in which the team is involved but also with regards to the cost being incurred. The SMARTER Model allows us to track which are the areas where we are incurring more legal costs and this will be key to analyze and decide where we need to develop or adjust the model in the future. As a manager of the EMEA region, I feel that I have better control over what is happening in the region because of the "real time" information I receive about what is happening from a legal and compliance perspective, but we can also provide the business managers with useful information about the predictable legal cost, which they appreciate. At the same time, our exposure to legal risks, fines and penalties is reducing and I am glad that our cost-per-hour rates for legal advice are going down, too.

Editor: How important to the selection of Eversheds was its willingness to commit lawyers to Tyco on a full time basis and to provide coverage from their many offices?

Aznar: Very. They were willing to integrate their team into our regional teams. They had the capability to provide us with full time lawyers dedicated to Tyco. They are all locally qualified. Our regional counsel are qualified in the country where they are based. The full time Eversheds lawyers are also qualified in the countries where they operate - some of our lawyers have dual qualifications as well. All the full time Eversheds' lawyers were drawn from a local office of Eversheds.

Our Eversheds full time equivalent in Poland is a Polish qualified lawyer. The same is true in South Africa. Then in countries where we do not have full time people, we use the Eversheds' network. For example, in Greece or Russia we do not have full time lawyers, but Eversheds has an office in each country and when we need legal or compliance advice in that country, we contact the Eversheds' office there.

Editor: It seems to me that the quality of the advice that the general counsel gives to the CEO and the board on any matter is dependent on the general counsel being plugged in. How is reporting moved up to the appropriate level within the company when something happens in the EMEA region?

Tanzer: In Europe, we have a significant number of lawyers on the ground, including the nine Eversheds lawyers working full time for Tyco throughout the EMEA region, seven Tyco regional lawyers plus a legal specialist in each region and Enrique, David and Trevor.On a daily basis, if one of these lawyers hears of a matter or gets a call from a business person about a compliance issue, they will alert Enrique, as the regional compliance counsel. Enrique will then contact me and also Trevor Faure, EMEA General Counsel, about any matter that warrants attention at a higher level. I will then communicate with Tyco's General Counsel or with Trevor as appropriate. On a regular basis, the whole compliance team has biweekly calls to keep each other informed as to what is going on around the world, and Tyco's General Counsel has a weekly senior staff meeting where she is kept up to date on events happening in the company globally.

Editor: Can you comment on the results of the compliance program, including Eversheds contributions to those results?

Aznar: Tyco's corporate governance rating in 2006 by Governance Metrics International (GMI) increased to a perfect 10 from 1.5 in 2002 (Tyco's GMI rating was 9.5 as of May 2007). That gives you an indication of the importance and impact that our governance and compliance programs have had. Following the arrival of the European general counsel in 2004, the first hire in the EMEA was a chief compliance officer.

External Resources is one of the three components of the model in our region and Eversheds has definitely provided valuable assistance. They provide us with increased coverage in regions like the Middle East where we do not have a lawyer from Tyco's legal department or Eastern Europe, where we have a Tyco regional counsel who covers a broad and complex region with a high number of jurisdictions and different languages. We count on Eversheds to improve the quality of our service because they have the reputation and expertise to support us. Improved quality control was one of the reasons why we decided to go with only one legal provider and not with a number of them. We thought that Eversheds would provide a high and homogeneous quality level.

Editor: How does Tyco propose to improve on such a wonderful record?

Tanzer: One of our fundamental goals is to embed compliance in the culture of the company. We are placing more emphasis on the ethical leadership aspects of our compliance program. Our goal is to impact the hearts and minds of our employees so that doing the right thing becomes automatic. We are trying to do this through leadership training, constant messaging and active rewards and discipline in response to the right and wrong behavior. We have already rolled out a new training program on ethical leadership to the top leaders at the company, which has begun cascading down. We are also planning a session at our global leadership meeting specifically on ethical leadership, to be introduced by the CEO. This is an annual meeting where the top few hundred managers in the company gather to discuss business strategies. We are clearly setting the "Tone at the Top" and our plan is to cascade this down through middle management to set the same tone and expectations throughout the entire organization.