Jules Kroll is widely regarded as the father of the corporate intelligence industry.
But he doesn’t want to talk about history. (When asked to identify the highlights of his storied career, he refers a reporter to a 2009 New Yorker profile — “The Secret Keeper: Jules Kroll and the World of Corporate Intelligence.”
Kroll, now chairman of the board of K2 Intelligence, wants to talk corporate crime and the failure of government policies to control it.
In Kroll’s view, despite all of the criminal prosecutions, compliance programs, fines and sanctions, corporate ethics hasn’t improved.
“It’s pretty self explanatory,” Kroll told Corporate Crime Reporter in an interview last week. “You have a surfeit of compliance regimes. You have a lot of time devoted to what I would call check the box activities. I don’t believe it has changed the ethical behavior of the individuals involved. But it has added to our costs. It has limited our competitive ability. And you have companies out of Asia that are not behaving the way they should be. And you have a lot of US and other OECD countries struggling to keep up because they are competing with people that have a totally different value system.”
In the US, prosecutorial resources have been focused on insider trading instead of Wall Street banks.
“Insider trading is an important issue,” Kroll says. “But there are many other issues that are just as important, if not more important — issues such as accounting fraud, misstatements and misleading of investors. You have a disproportionate amount of energy devoted to insider trading. That’s true in part because insider trading cases are easier to bring and easier to win.”
“With insider trading cases, you have specific events occurring in specific time frames. And records are more easily available. And yet it doesn’t seem to have changed people’s behavior on this issue. I do think it’s time for a review of what’s working — including, from a sentencing point of view, whether or not the sentences have gotten excessive for some of these matters, such as insider trading. And whether more resources should be devoted to cases that are more difficult to bring, for example, cases having to do with the statements made that led to the financial crisis. Senior officials of public companies were saying things that were proven to be grossly misleading. And the harm that was caused was quite significant. But yet, virtually nobody was tagged.”
“If you look at the range of offenses, compared to where the prosecutorial time has been spent, one does have to ask whether or not this has to be reviewed.”
And, like former SEC enforcement director Stanley Sporkin, Kroll believes that the gatekeepers are in part responsible for the wave of corporate wrongdoing.
“These accounting firms and law firms have become enormous enterprises,” Kroll says.
“What do the auditing firms and big law firms do for us in terms of prevention of what occurred in the financial crisis?” Kroll asks. “The reality is, they were in there with both hands themselves. And I’m not sure what kind of positive role these institutions play. Not only have there not been criminal prosecutions at these financial institutions, there haven’t been at the law firms or accounting firms either, except in very isolated instances. And those were instances where they acted against their own institutions. In terms of institutional behavior, they walked away. And they were at the table.”
Kroll says that one way to change behavior is to change executive compensation policies.
“From a public policy point of view, you have laws passed, regulations put in place,” Kroll says. “And behavior is affected by law and regulation. But behavior is also affected by issues of compensation. Behavior is affected by the nature of the business one chooses to go into. So, it’s not all about regulation and it’s not all about what the prosecutors and the regulators do. That’s only an aspect of it.”
“How people behave is easily more affected by economics and compensation than by all the regulations in the world.”
“You have CEOs that are making $25 million a year or more. You have people who are in private equity and hedge funds that are being paid enormous sums of money depending on where the price of their stock goes. Then you have this tremendous temptation to do the wrong thing. And those weigh more heavily on people’s behavior than what the penalties are. It’s a societal question. It’s not only regulatory regimes. It has as much or more to do with what we are doing as a society as far as how we compensate people.”
“One of the things that has gotten out of control is when people who are managing money and who are really not doing that great a job at it, they are getting paid extraordinary amounts of money. That has more to do with behavior than whatever the regulations may be.”
“If you look at who has been convicted, it’s mostly people working at hedge funds because the incentives and the pressures on those people are extraordinary. That has as much or more to do with this as the criminal justice system. Those of us who focus on the criminal justice area think it’s the be all and end all. And it’s really just part of the picture.”
Kroll says that his firm spends about 60 percent of its time on compliance and related issues, 25 percent of its time on fact finding in corporate disputes and litigation, and the remaining 15 percent or so on a variety of fact finding related activities around the world.
His competitors include the major accounting firms, his former firm Kroll Inc., and a number of other similar investigative firms, including Navigant, FTI and Control Risks.
Many of the white collar defense law firms do the kind of work that Kroll is doing. Are the law firms your competitors also? Or are they your clients?
“I would call them frenemies,” Kroll says. “They are both friends and competitors. That is one of the things that has changed over time. There has been a great deal of growth among these defense law firms. And that was unusual back in the day. You didn’t see the large law firms adding white collar practices. It began in the late 1980s. But it has been a phenomenon mostly of the last twenty years. We work with these firms. And at times, we will be competing with them. It goes both ways.”
[For the complete q/a format Interview with Jules Kroll, see 28 Corporate Crime Reporter 36(13), September 22, 2014, print edition only.]