It’s popular to play the blame game.
Two weeks ago, Fannie Mae released the report of an internal review conducted by former U.S. Senator Warren Rudman and Paul, Weiss, Rifkind, Wharton & Garrison. It is 2,652 pages, so please don’t just hit “print.” An executive summary is here.
The WSJ Law Blog had an early take, asking if the lawyers (particularly law firm WilmerHale) were to blame in part for Fannie Mae’s accounting problems. (The WSJ Law Blog had taken a similar line with Enron and its in-house lawyers; I’ll have a few thoughts on that next week).
Since I deal with many legal matters as a GC which involve corporate compliance, I have to do more than point fingers. I have to try to be part of a solution in making things better. One of the best ways I have found to do this is to try to foster a compliance-friendly culture (aka “do the right thing”), rather than just a prescriptive, command-and-control work environment (aka “do X and we’ll fire your …”).
It’s easier said than done.
Now comes an article in last weekend’s Seattle Times which sheds some light on the Rudman report and the compliance culture at Fannie Mae. Long story short: not good.
Buried in the 2,652-page report on Fannie Mae that was released recently was the transcript of a speech a Fannie Mae exec planned to make invoking the name of Franklin Raines, former chairman and CEO of the embattled mortgage giant.
Sam Rajappa, who at the time worked for the Seattle native as the head of internal auditing, told his employees that under Raines they had a “moral obligation” to make money.
“Remember Frank has given us an opportunity to earn not just our salaries, benefits, raises … but substantially over and above,” for meeting financial targets, Rajappa planned to say in a 2000 address to his underlings.
“So it is our moral obligation to give well above 100 percent and if we do this, we would have made tangible contributions to Frank’s goals.”
You have to wince when a “leader” in internal audit invokes a moral imperative along the lines of making money. The clear implication to those listening was likely to put it above all else. When this is the orientation of the auditors, you have to wonder what things were like among line managers with direct P&L responsibility.
By late 2004, when things were going off the rails and Mr. Raines was retiring under a looming regulatory cloud, he adopted a markedly different tone:
That fall, he had conceded in talking points for a speech to his fellow executives that Fannie’s culture had not served it well.
“We may have believed our own PR a little too much,” Raines’ talking points read. “We allowed ourselves to be arrogant. We thought we had a lot to teach and little to learn from others.”
When a culture is not supported by ethical behavior from senior management, it’s not surprising that compliance can take a back seat. This mis-alignment provides a fertile environment for improper activity to take place. People model and follow what leaders do (or they leave).
And the company’s lawyers, accountants and auditors have this to look forward to every day:
Update (8 Mar 06): Wal-Mart is getting on the compliance bandwagon; CNN reports that the mega-retailer is looking for a Director of Global Ethics. I found the position description here. Someone told CNN that Alan Greenspan might be a good candidate. I think he will be rather busy working to earn an $8 million+ advance for a forthcoming book.