By Nathan H. Seltzer, David Berman, Christopher D’Agostino and Nell Perks
On January 13, 2020, Major League Baseball (MLB) Commissioner, Robert D. Manfred, Jr., handed down significant punishment to the Houston Astros organization (the “Ballclub” or “team”), its General Manager Jeff Luhnow and Field Manager A.J. Hinch for sign-stealing by the Ballclub during the 2017 season and playoffs. In addition to a fine and forfeiting draft picks, the General Manager and Field Manager were suspended without pay, meaning they would miss a full season of baseball. Shortly after, the team’s owner, Jim Crane, fired them both, stating that “I have higher standards [ ], and I am going above and beyond MLB’s penalty,” and that while “[n]either one of them started this, [ ] neither one of them did anything about it. … We will not have this happen again on my watch.”
Notably, the Commissioner’s decision emphasizes the Managers’ accountability for failing “to adequately manage the employees under their supervision, to establish a culture in which adherence to the rules is ingrained in the fabric of an organization, and to stop bad behavior as soon as it occurred.” The Commissioner’s emphasis on the importance of culture in setting the tone for an organization is not a unique message from governing authorities. A growing number of prosecutors and regulators in the United States and worldwide have been stressing the importance of corporate culture in establishing the values for an organization and helping to prevent conduct inconsistent with those values. Authorities have also stressed the importance of measuring and monitoring culture to ensure the institution moves in the right direction. The MLB investigation and other recent corporate crises provide companies of all types the timely opportunity to take practical steps to proactively and meaningfully assess their culture to help prevent crises from arising. [1]
The MLB Investigation & Commissioner’s Decision
Following public allegations, the Commissioner found that the team engaged in prohibited sign-stealing methods by using a center field camera and a monitor near the dugout to decode signs and then communicate to the batter the upcoming pitch type by banging on a trashcan. The Commissioner’s decision explained that the conduct was “player-driven,” with the exception of the Bench Coach, Alex Cora.
In evaluating culpability, the Commissioner explained that the team’s illegal sign stealing was “not an initiative that was planned or directed by the Club’s top baseball operations officials.” Rather, the banging scheme was “with the exception of [Bench Coach] Cora, player-driven and player-executed” and the replay-review-room scheme was “originated and executed by lower-level baseball operations employees working in conjunction with Astros players and Cora.”[2] Nonetheless, the Commissioner held senior leadership accountable on the basis that the Astros’ violation of rules was attributable to “a failure by the leaders of the baseball operations department and the Field Manager to adequately manage the employees under their supervision, to establish a culture in which adherence to the rules is ingrained in the fabric of the organization, and to stop bad behavior as soon as it occurred.” [3].
He found it “very clear” from the investigation that the culture of the baseball operations department was problematic, describing it as “one that valued and rewarded results over other considerations” which “combined with a staff of individuals who often lacked direction or sufficient oversight, led, at least in part, to the … incident [involving the Club’s then-Assistant General Manager], the Club’s admittedly inappropriate and inaccurate response to the incident, and finally, to an environment that allowed the conduct described in this report to have occurred.” [4]
The Commissioner acknowledged that the Field Manager had not participated in either scheme but had “attempted to signal his disapproval of the scheme by physically damaging the monitor.” [5] However, the Field Manager did not tell his players he disapproved or direct them to stop the conduct. The Commissioner therefore concluded that “[a]s the person with responsibility for managing his players and coaches, there simply is no justification for [the Field Manager’s] failure to act.” [6]
Lessons For Companies and Corporate Leaders From the Commissioner’s Statement
First, institutional culture matters not only because it reflects an organization’s values, but also because regulators are watching. Notably, the Commissioner highlighted culture’s relevance to his assessment of culpability. The US Department of Justice (“DOJ”) has emphasized the importance of a “culture of ethics and compliance” in its guidance on the Evaluation of Corporate Compliance Programs (April 2019). Other regulators, including the US Securities and Exchange Commission, [7] and UK Financial Conduct Authority (FCA), have similarly stressed culture as a central focus.
As a result, although culture has often been regarded as an inherently nebulous concept and a “soft” skill solely within the province of a company’s human resources department, it is increasingly recognized as something that is institution-defining and the responsibility of all corporate leaders. Whether culture is understood as how employees behave when nobody is looking, the habitual behaviors and mind-sets of the organization, or the shared commitment to how it conducts business, it reflects the conduct and behaviors influenced by the company’s values and ethics. It is certainly more than a set of written policies and procedures.
Second, corporate managers must adequately supervise their employees, set the right tone, and demonstrate rigorous adherence to high standards. The case is a reminder to companies of the importance of the tone from the top, and also the “tone from the middle”—i.e., how middle managers, who most directly interact with line employees, must model high standards.
The DOJ’s guidance on corporate compliance programs emphasizes the need for corporate leaders, including the board and executives, to “demonstrate[] rigorous adherence by example.” [8] It directs prosecutors to ask how senior leaders “through their words and actions, encouraged or discouraged compliance,” what “concrete actions have they taken to demonstrate leadership in the company’s compliance,” and “how they have modeled proper behavior to subordinates.” It further instructs prosecutors to ask whether “managers tolerated greater compliance risks in pursuit of new business or greater revenues.” These are important questions for companies to ask themselves in assessing and then measuring their cultures.
Third, corporate managers must stop bad behavior as soon as it occurs, with the knowledge that mild objections may be seen not only as condoning but also effectively encouraging misconduct. The Commissioner found that the Field Manager’s non-action provided players with tacit approval if not encouragement. The Field Manager noted that he neither participated nor endorsed the conduct, but he apologized for failing to stop it. These facts are a reminder that corporate managers have a responsibility, as part of modelling the company’s culture and values, not only to raise issues but see that they are heard and resolved.
Fourth, companies should work to develop not only a “speak up” culture, but also a “listen up” culture. The Commissioner’s decision does not reveal whether anyone raised objections during the 2017 or 2018 seasons, but the case is a reminder why a culture in which employees feel safe raising concerns is so important. Just as important (and sometimes less of a focus for companies) is that companies work to develop a “listen up” culture in which corporate managers really listen and respond to help remove the potential stigma from speaking up.
Fifth, institutions that lose sight of their values and prioritize short-term results while discounting the future, frequently run into problems. Whether leaders overemphasize short-term financial results or employees cut corners to meet tight deadlines, when company personnel lose sight of the long-term best interests of the company, companies often run into trouble and there is enhanced risk people will do foolish things and that can tarnish the company’s brand and results. A hard-charging culture or pressure to meet goals or deadlines is not necessarily bad; indeed, it may be entirely appropriate. However, it is important that the company’s values and mind-sets are positively ingrained in the organization and that employees’ conduct remains consistent with those values.
Sixth, when misconduct does occur, companies should impose meaningful sanctions. In this case, the Ballclub’s owner decided that what occurred was not consistent with the culture the organization should have, and went beyond the Commissioner’s penalties. He made clear that he expected more for the organization and the city of Houston. [9] Rather than letting senior leaders off-the-hook, the owner sent a powerful message that more was expected of them because of their positions and, as a consequence, the sanctions were more severe.
Taking the Next Step: Measuring Culture
Deciding upon and implementing values and a corporate purpose is a critical first step, but it is not the end of the cultural journey. Companies are recognizing—and prosecutors and regulators are emphasizing—that measuring and monitoring culture is necessary. In its April 2019 guidance, the DOJ highlighted not only the importance of culture generally, but how and how often “the company measures its culture ….” And, “[w]hat steps has the company taken in response to its measurement of the compliance culture?” In other words, culture is not a static concept and it is important for organizations to ask themselves whether their culture is moving in the right direction.
However, there is little practical guidance for companies on how to do that. Fortunately, many companies are already collecting helpful metrics and information that allows them to evaluate their cultural trajectory and review matters through a “culture lens.” For example, companies will typically collect quantitative data measuring corporate culture, such as training completion levels, employee turnover, absentee rates, and hotline reporting information. Using such data, along with other sources, to assess and improve a company’s culture can be instructive.
Footnotes
[1] Culture — A Practical Framework for Sustainable Change.
[2] Id.
[3] Id. at 4-5
[4] The incident referenced by the Commissioner involved the then-Assistant General Manager who boasted of the team’s acquisition of a player who served a 75-game suspension for violating MLB’s domestic-violence protocol, in front of a female reporter who wore a purple bracelet recognizing domestic violence and had tweeted contact information for women’s services when the player pitched in 2018. The Ballclub initially denied her reporting of the incident, but ultimately fired the Assistant General Manager and the owner sent a letter personally apologizing to the reporter and retracting the team’s initial denial.
[5] Id. at 7.
[6] Id.
[7] Andrew J. Donahue, Remarks at Keynote Speech at Rutgers Law School Center for Corporate Law and Governance – 2016 (May 20, 2016), https://www.sec.gov/news/speech/donohue-rutgers-new-directions-corporate-compliance-keynote.html.
[8] DOJ Evaluation of Corporate Compliance Programs (PDF: 268 KB) at 9.
[9] Within a day of the Commissioner’s decision, moreover, the Red Sox “mutually agreed to part ways” with Alex Cora as their Field Manager, even while MLB’s investigation into the Red Sox conduct in 2018 is still pending.
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