Guidepost Solutions chairman Bart Schwartz knows corporate monitors.
He was the corporate monitor in many high profile cases, including British Petroleum and Deutsche Bank. And he’s currently the corporate monitor that grew out of the deferred prosecution agreement with General Motors.
Schwartz is a founding member of a newly formed group – the International Association of Independent Corporate Monitors (IAICM).
Schwartz started his career prosecuting corporate crime cases with Rudolph Giuliani, then U.S. Attorney in Manhattan.
How has the practice changed since then?
“Prosecutors realized they could recover large fines,” Schwartz told Corporate Crime Reporter in an interview last week. “That became a large part of prosecution. In the early years, that was not a factor. In the office I was in, in the Southern District of New York, we were focused on individuals, not as much on corporations. When you are thinking more about money and financial recoveries, you are more likely to go after corporations and not just the individuals. That impacts the investigative and prosecution side as well as the defense side.”
The other thing that has changed dramatically is the type of settlements. It used to be guilty plea or go to trial. Now, it’s this settlement practice with deferred and non prosecution agreements.
“Although I must tell you , the first settlement I did in 1986 was my first monitorship. Early on, I thought it was an excellent vehicle for improving industries and bringing the kind of change that individual prosecutions often don’t bring.”
“It was for Quadrozzi Concrete. The whole industry was under investigation. And a number of companies had monitors overseeing their conduct.”
The corporate probation officer is like a parallel to the monitor, right?
“I don’t agree with that. I don’t think monitors should be appointed unless the government believes that the company is genuine about wanting to change and get things right. It should not be seen as a substitute for punishment. It should not be seen as an extension of punishment. It should not be a substitute for the inability to make the criminal case. If you don’t have a case, you don’t have a case. You don’t use a monitor as a way to make up for your lack of proof.”
“Most of the cases I do are federal. I have done a fair number of state cases. The cases I’m in involved with are usually companies that are committed to make a change — because they need to and want to and it’s good for business. And the monitor is there to help them make those changes, not simply as a probation officer to make sure that their conduct is correct. What processes do they have? What codes do they have? How do they enforce them? That’s all part of monitoring.”
“It’s much more than a probation officer.”
What can you tell us about your monitorship with General Motors?
“I can’t talk about it. I can talk generally about monitorships, but not about any individual one.”
In the typical monitorship, do you get an office inside the company?
“Yes. Usually, there is office space made available. It’s a secure office space. You have a job to do to make sure that the company is doing what they agreed to do. But you are also trying to help the company build and make changes. It’s a combination role. Usually, I have an office there. It starts by spending time with the government to find out what its expectation is for the monitorship. Then spending time with the company to see what its expectation is and see if they are the same. Even though they have reached an agreement, they don’t always see it the same way.”
“Sometimes you start by being a mediator to make sure everybody is on the same page and in agreement on the end goal. Then you immerse yourself in the company to learn as much as possible. You bring experts in — perhaps people with industry expertise. And you prepare a work plan.”
“The work plan should be shared by the government and the company. You may accept their comments. You may not. But I don’t think there is any real value in just ordering a work plan without having some consultation with both sides. And then the work plan becomes a guide. It’s rare that it is followed to the letter. Things arise that may not have been in the original work plan. There may be emergencies. But a work plan is a good working document to start with as you learn more about the company.”
As a monitor, who is your client?
“There is no client.”
Do monitors report to a federal judge?
“Districts do it differently. In most cases, there are reports. In some districts, they might do it to the court. And then the reports are usually sealed. In some, the reports are made to the prosecutor or to the regulator. There are some protections to keep the reports confidential. And it’s good to have a reporting process. Some do it every year. That’s too long a period of time. Most monitorships are two or three years. Only doing a couple of reports is not enough. Part of it is — you need more deadlines. You get more done with more deadlines. But quarterly or twice a year works better than once a year.”
There is now litigation over whether monitor reports should be made public. The Second Circuit just heard arguments in the HSBC case. Should the monitor reports be made public?
“I don’t think so. I would be worried that you are not going to get the full open access you need with a company. They are not going to be as willing to share the problems they have, which you need them to do, as well as the problems you discover on your own. I don’t think it would be as effective to have these as open records.”
“There is also the question of protecting intellectual property and methods of doing business. You get into great detail into how they operate. Overall, it would complicate and make it more difficult to do the best job possible.”
What about redaction? There is a public interest in these cases. In most of these cases, the cases could have easily have been criminally charged and brought to some kind of plea, but there was a deferred prosecution because of other considerations.
“When that decision is made, whatever is made public by the prosecuting authority should be sufficient. In fact, in most of the cases I can think of, there is an extensive statement of facts that companies agree to. In essence, it’s a confession. The public knows what the facts were on which the decision was made. The public also knows the commitments that the company has made to change. Some are general. But some are quite specific as to the changes that need to be made. The public is informed as to how the decision was arrived at.”
“The solution is much more complicated. And if you want to have the best solution, you have to get everybody to open up their books, their records, their people and work with the monitor to make the changes.”
Although we are seeing recidivism — companies get repeat deferred prosecutions for similar behavior. To prevent that kind of recidivism, isn’t there a real public interest in knowing what impact the monitor had and what the results were?
“I don’t know. That’s case by case. If there is true recidivism and there is a second series of charges being brought for similar conduct, I expect that would be carefully laid out in the deferred prosecution agreement. That’s where the information would be. What went wrong and the details about it.”
How do you know whether a monitorship has been successful?
“If a company does not get in trouble while you are the monitor, it proves almost nothing. While you are looking over someone’s shoulder, that’s not the test. The test is what happens after the monitor leaves. The biggest challenge a monitor faces is sustainability of the solutions. And I put culture within that. Culture is something you are trying to influence. Assuming you are successful while you are there, how do you sustain those changes and make them a part of the culture?”
“How do I try to do that? Tone of the top is the obvious one. Everyone will address that. I try to determine whether there are elements within the company that will be helpful to me as my work as a monitor. For example, internal audits. If the company has a solid internal audit group, and they are not tainted by the conduct that brought me there, then I will try to use internal audit, not abdicate my responsibility to them, but use them, or look at their audits, and get them to understand what I’m trying accomplish as a monitor.”
“There are a number of advantages to that approach. There are people in the company’s internal audit unit who know the company better than I’m ever going to know it. They have an independent mindset. They stay after I leave. I’m training people who will be there after I’m gone. And it’s fair to the company, because I’m using some of their resources instead of spending money duplicating resources.”
“Many of the companies I’m involved in are large companies. I pay attention to their succession planning. Companies identify future leaders. I spend a lot of time with those future leaders. Knowing that five or ten years from now, when they are taking their leadership positions within the company, we have trained them on what the elements of monitorship are — whatever the issues might be. That’s critical to being successful.”
“In one monitorship, I was there for three years. Huge company. Big problem. It ended quite a number of years ago. But people are still coming back to me now, telling me that they have been able to maintain the culture and the values that I made part of the monitorship when I was there.”
“Most companies confuse compliance and ethics. They are different things. If you think about it, compliance is about getting as close to the line as you can without doing the wrong thing. Ethics is about doing the right thing. If you can improve the ethical approach in a company, particularly international companies where ethics shouldn’t change from continent to continent, you can really have a terrific influence on the company and avoid problems instead of ending up with a monitorship.”
What is the batting average for the success of monitors?
“I’ve never looked at it that way. We just don’t know what happened inside a company. It may not all become public.”
Often you see companies getting monitors and then getting into trouble again after the monitorship.
“That doesn’t necessarily mean that the monitorship failed. That would be an easy conclusion to reach. These are companies made up of people. When a company has a problem, how did they react to it? You are not going to get a company with 50,000 employees — not everybody is going to do the right thing every time. But when a company learns of a problem, how did they react to it? Was it a cover up? Or did they want to get to the bottom of it, punish the people who engaged in the wrongdoing, use it as an example to teach a lesson to others in the company? I would consider that a successful monitorship — if the company took the right steps once they found out about it.”
There have been failed monitorships. There are clearly ones that did not go well.
“I’m not sure we know enough to make that judgment. It would be a rare discipline where everybody got it right 100 percent of the time.”
Should the monitor be under the control of a judge?
“I don’t think that should be a necessary condition. If you look at the new UK system of deferred prosecutions, there is much more judicial involvement. And it’s something we ought to watch to see how it works.”
Are most of your monitorships under judicial control?
“No, that would be the exception.”
Who do you report to?
“The regulator or the prosecutor.”
[For the complete q/a format Interview with Bart Schwartz, see page 31 Corporate Crime Reporter12 (13), print edition only.]