Mastering a corporate monitorship

Adaption of a key note at the German Institute for Compliance (DICO) Forum Compliance on May 15, 2019 

A monitorship is an extremely serious matter. Volkswagen is 100% committed to fulfilling all obligations towards the U.S. Department of Justice (DoJ) and the U.S. authorities. We work on our credibility, review the mistakes we have made and institute the necessary changes with determination to ensure that something like the diesel issue never happens again.

An open culture, strong values and integrity in everything we do are essential for a positive future for Volkswagen. Having a monitor at our side in this important endeavor is a great opportunity to move Volkswagen and our corporate culture in the right direction.

— This is our ambition: to be an honest, ethical and respectable company. —

What is a monitor?

A monitor is a common instrument implemented by U.S. authorities in company proceedings. The monitor is an independent third party whose main job it is to monitor compliance with the terms of the settlement agreements. His work focuses on the present and future; his task is remediation and not a repeated investigation into misconduct.

U.S. authorities do not view the appointment of a monitor as punishment; we – in Europe – have to remind ourselves about this from time to time. However, for organizations in Germany, a monitor is still an instrument that requires explanation and that not every manager intuitively understands.

Where do you find a monitor?

There is quite a bit of literature on monitorships, the most prominent being publications by the DoJ, named after the high-ranking DoJ officials who published them.

Technical details on the selection procedure and commissioning of monitors are set out in the 2008 Morford Memorandum based on nine general principles. The 2010 Grindler Memorandum added a further principle to the Morford Memorandum concerning the role of the DoJ in resolving disputes between monitor and company.

The Benczkowski Memorandum, published in October 2018 as a revised version of the 2009 Breuer Memorandum , requires public prosecutors to consider the benefits and costs of appointing a monitor carefully.

Whether the appointment of a monitor is beneficial from the U.S. authorities’ point of view is subject to the circumstantial factors and severity of the misconduct. In particular, the involvement of high levels of management in the misconduct increases the likelihood for a monitorship.

Second, type and scope of the remediation measures the company has already implemented will add to the determination whether or not a monitor should be appointed.

At the same time, public prosecutors should consider the financial and operational burden a monitorship imposes to the company. This does not only include the costs directly incurred by the monitor but also indirect internal costs. It also includes appropriate consideration of the adverse effects a monitorship may have on the company’s core business processes.

In publishing the Benczkowski-Memorandum, the DoJ issued two new and important messages:

1. The scope of a monitor’s mandate should be as specific as possible and appropriately tailored to avoid unnecessary burdens.
2. Where a corporation's compliance program and controls are demonstrated to be effective and appropriately resourced at the time of resolution, a monitor will likely not be necessary.

It is probably too early to view these messages as a shift in paradigm. However, the DoJ obviously deemed necessary to tighten the general conditions for the appointment of monitors, possibly a sign of somewhat excessive practices in previous years.

We will have to wait and see what impact these regulations have in practice, probably a tendency towards fewer and more specific monitor mandates. In any case, the new requirements provide a clearer and better basis for argumentation for companies wishing to avoid a monitorship.

What is a reasonably designed and effective compliance program?

The key question is what makes a compliance program appropriate and effective? There is also a publication on this subject by the DoJ containing over 150 specific questions on assessing a corporation’s compliance program. This current publication dated April 2019 is an updated version of the same document from 2017.

Important new feature: the document groups the more than 150 individual questions along the following three guiding questions:

• Is the corporation’s compliance program well designed? – This question relates to design effectiveness.
• Is the corporation’s compliance program being implemented effectively? – This question relates to whether it has been fully implemented and included in structures and processes.
• Does the corporation’s compliance program work in practice? – This question relates to operating effectiveness.

Compliance experts are very familiar with these three guiding questions. By using these three, the DoJ categorizes the detailed questions in a comprehensive fashion that is in line with other compliance standards.

The essence is in the details ...

The main topics grouped under each of the three questions in the DoJ publication outline the focus in content. Similarly, the practical work of a monitor is tied to these areas of focus representing typical cornerstones of good compliance programs.

It is hard to imagine how compliance programs could nowadays be appropriate without well-designed whistleblower systems, clear and regular communication from the top, a comprehensive Code of Conduct or an appropriate compliance footprint in the human resources lifecycle processes.

However, aside from many different standards and good practices, a company’s compliance program should eventually be viewed as a holistic system in which the elements will be most effective in combination. Especially in large and complex corporations it may therefore be a difficult task for a monitor to assess the effectiveness of the system as a whole.

The success of a monitorship also depends on its timing in the lifecycle of a corporate crisis and its remediation. Volkswagen has been working intensively on the diesel issue with a comprehensive set of measures since the end of 2015. It is obvious that for a group like Volkswagen such issues cannot be resolved within two quarters of a year.

The monitor has been working on-site at Volkswagen since mid-2017. Consequently, the monitor’s term and the company’s remediation efforts significantly run in parallel. This surely represents a tremendous challenge. Other companies have had more time to focus on remediation measures before a monitor’s oversight commenced. 

Key components of a successful monitorship

Regardless of the breadth and depth of a monitor’s mandate and the timing of the monitorship, companies under monitorship must clearly understand two aspects in order to be practically successful.

• Monitor team organization
• Monitor’s working rhythm and reporting obligations

The monitor’s internal organization

Based on the experience made in cooperating with a large monitor team, it is essential that the monitor team is provided with adequate “contact points” in the organization early in the process of cooperation. It is worth establishing a stand-alone interface organization (liaison office).

Such a liaison office not only takes care of standardized administration of the entire communication process between the monitor and company. It also creates a neutral, conciliating link between monitor and relevant corporate functions.

The monitor’s working rhythm and reporting obligations

The monitor’s work is determined by his obligations vis-à-vis the DoJ. The monitor essentially follows a cycle of (i) planning, (ii) reviewing, and (iii) reporting, the latter including recommendations for action.

This cycle, for example, directly affects the number of document and meeting requests by the monitor. At another point in the cycle, when the monitor has issued a report including recommendations, the company’s focus shifts towards a timely and thorough consideration and implementation of such recommendations.

There are certain limitations to influence the cycle and the monitor’s behavior. In addition, companies under a monitorship need to understand that deadlines issued by the DoJ are binding. Moreover, in many cases such deadlines do not consider operational restraints and business requirements of the company.

For every phase in the cycle, processes need to be straight and effective in order to meet the expectations of key stakeholders. A liaison office has proven to be a useful driver to ensure stringency and pace across the entire organization.

What is the impact of a monitorship?

Accelerating effect

The rhythm of the monitorship alone accelerates the organization. The monitor’s outside viewpoint and tracking of activities prevents initiatives from getting stuck in operational restraints. The company must deliver during this period in order to be certified – full commitment is required at all levels.

Sustainable change towards a culture of integrity

Monitors know that a three-year mandate is not sufficient to measure true cultural change. Despite this, the monitor is focusing on long-term measures. No monitor leaves without setting specific follow-up tasks. Ultimately, it is far more a matter of establishing a culture of integrity than just compliance measures.

U.S. based view and understanding of compliance

The DoJ appointed monitor brings a clear view and understanding of compliance – centralistic and with a strong and direct impact on all parts of the company’s worldwide organization. European corporations are also influenced by other mechanisms.

There can be strong decentralized players, for example the large brands in Volkswagen Group. Bringing together these views sometimes leads to friction – in such instances, both the organization and the monitor need to learn from each other.

Success factors in day-to-day work with a monitor

Ambition and expectations – perfection and pragmatism

Anyone who has ever substantially renewed a whistleblower system or a code of conduct and then implemented these group-wide knows that a 3-year monitorship is relatively short. Nonetheless, the monitor needs to see and verify operational effectiveness otherwise he cannot grant certification in the end.

For his assessments, the monitor uses generally accepted standards which are rarely based on a school grade D but usually take a best-in-class perspective. The challenge is finding a pragmatic compromise – together with the monitor and from the very beginning.

Effective Cooperation – understanding the monitor (correctly)

It may sound trivial: challenges in cooperation with the monitor sometimes start with the question: “Have we understood each other correctly?” or “When we use a certain term, do we mean the same thing?” – both with colleagues in-house as well as in communications with the monitor. 

Expectations, perceptions and differing terminology: consistent and trustworthy communication is of the essence. Otherwise, a tight schedule simply could not be adhered to.

In a nutshell

In a nutshell, a monitorship is a huge challenge. The mirror that the monitor holds up to the company clearly reveals potential weaknesses and inconsistencies. The expectations that the monitor formulates – either explicitly or implicitly – undoubtedly represent a benchmark.

Whatever risk-based approach he takes, the monitor tends to demand best-in-class. Thus, it is important to develop efficient processes that help meeting these demands.

Dear colleagues and friends,

I hope this article is helpful for you. As always, feel free to comment on this topic.

Best regards - Tom