Wynn, Part II: Third-Party Oversight
Today we revisit Wynn Resorts and the report its compliance monitor released last month. As you might recall, that report is a sweeping review of how Wynn has tried to rectify its operations after a sexual harassment scandal forced the departure of its founder and long-time CEO, Steve Wynn.
Last month we took a deep dive into the monitor’s analysis of Wynn Resorts’ corporate culture. Today, let’s look at how the troubled casino operator is trying to overhaul its management of third-party relationships.
Wynn had an interesting challenge here because perhaps more than most companies, it has two very different types of third parties: business partners such as vendors, promoters, lobbyists, and other agents; and customers, which Wynn likes to call “patrons.”
Business-related third parties pose the usual range of risks that compliance professionals know and love: bribery, fraud, corruption, and so forth. The primary risk from patrons, on the other hand, is sexual harassment of employees — and a culture tolerant of sexual harassment is what caused disaster for Wynn in 2018, when news broke of Steve Wynn’s predatory behavior.
So reducing that risk of sexual harassment has been a paramount objective for Wynn Resorts’ new management. Executives want to reduce the threat from patrons, when the whole idea of casinos is for people to drop their inhibitions; and they want to reduce the threat from business third parties too, among the many other risks those parties pose.
That’s a lot of third-party oversight to implement. Wynn’s compliance monitor gave the company mixed grades on its progress.
Managing Business Third Parties
Wynn already had a mature, developed process for background investigations of vendors, agents, consultants, and so forth. That’s not surprising, given the gambling industry’s long history with corruption and fraud. Even putting aside regulatory requirements for third-party due diligence, casinos have also long been the targets of swindlers; they know the importance of finding fraudsters.
So Wynn has written standards and procedures to perform due diligence on all its business third parties. As the monitor report put it (and quoted directly from Wynn’s standards):
[B]ackground investigations are designed to identify “materially derogatory information that would lead to a concern that the proposed transaction or relationship may increase the likelihood of bringing disrepute to the Company or to the gaming industry” such that a proposed transaction or relationship should not go forward, as well as other information that might not increase the likelihood of bringing disrepute, but could indicate the need to exercise caution.
I like that passage because it reminds us that due diligence isn’t simply an exercise done to satisfy regulatory requirements. It’s a support system to help management decide how to handle a third party. Due diligence is a capability every company should have, to help managers make better decisions.
Anyway, Wynn screens its third parties against 11 categories of possible trouble, neatly listed in the box at right. It’s the job of Wynn’s chief global compliance officer (currently Larry Whelan, who’s held that role since November 2018) to ensure those procedures get followed.
After a third party’s background investigation, Whelan decides whether to approve, block, or “indicate caution” about a third-party engagement. If the compliance officer blocks or warns about the third party, management can still push to use the third party anyway. First the general counsel presents a description of the engagement to Wynn’s compliance committee, and that committee must vote unanimously to approve it. If the compliance committee vote isn’t unanimous, management can appeal to the board of directors, but only at the unanimous request of the CEO, CFO, and general counsel.
In other words, Wynn has a rigorous process to flag suspicious third parties, and gives the chief compliance officer considerable power to block sketchy characters. Yes, management can still overrule the compliance officer’s recommendation — but only through an elaborate process that clearly hangs responsibility for that decision around management’s own neck. CCOs can’t expect more than that.
And what happens when Wynn’s due diligence of business third parties turns up concerns about sexual harassment? Funny you should ask. Sexual harassment is not a primary focus of the company’s due diligence screening, but such evidence is found anyway, Wynn executives take note. Again, from the monitor’s report:
[I]n at least one instance, the company’s background screening uncovered an allegation of harassment filed against a proposed vendor’s employee. Although the company moved forward with the engagement, on a weekly basis, the company monitors relevant sources for additional information regarding the initial allegations and is prepared to terminate the engagement in the event the allegations are proven.
In other words, Wynn leverages its due diligence procedures to reduce the risk of sexual harassment. It’s not a perfect system, since incidents of sexual harassment rarely end up in databases that due diligence programs use for screening. But it’s a good step to take, and the compliance monitor did praise Wynn for its due diligence of third parties.
Managing relationships with patrons was more problematic for Wynn. As the report said: “Senior and middle management at the company are aware that patrons are the highest risk factor for sexual harassment and discrimination, but have not yet identified an effective strategy to curb the offending behavior.”
Wynn does have written policies for employees about how to handle offensive patrons. First, employees should remove themselves from the situation. Second, a manager should intervene to tell the customer to behave. And third, if necessary, security can escort the customer off the premises.
Still, in focus groups the monitor conducted with employees, not all employees believed management would support them when they suffered harassment from customers. For egregiously offensive conduct like someone grabbing a cocktail waitress’ behind — yes, employees believed management would be on their side.
For less egregious behavior, however, and especially if committed by VIP customers:
A majority of employees noted an inconsistency in how the company defines and responds to inappropriate behavior from certain categories of patrons and hotel guests… some managers and supervisors “may be behind [them] 100 percent” and take immediate action against offending patrons, others respond by saying that “there is nothing they can do about it,” leaving employees with the unstated understanding that tolerating certain offending conduct “is part of [the] job.”
Managers saying, “There’s nothing we can do.” Hmmm.
When managers say there’s nothing they can do, they’re saying they believe they have no power to act. That suggests a conflict in the company’s priorities.
Managers see a problem that needs solving, so their ethical radar is working; but they feel overruled by some other priority. Usually that means they believe senior executives prize business performance more than ethical conduct.
Perhaps that perception of business performance overriding ethics is accurate, and senior executives need an adjustment. Or perhaps it isn’t true, which means that somewhere there’s a breakdown in communication of corporate priorities. Regardless, managers saying “there’s nothing we can do” is a red flag that tells compliance officers a lot.
In Wynn’s case, the tension is between providing excellent service to customers and preserving a harassment-free environment for employees. So what should Wynn do about it?
Consider: implicit in the “there’s nothing we can do about it” sentiment is the idea that offensive patrons are a fact of life; that providing excellent service means allowing them to drop social norms and act like boors.
Well, who says that needs to be true?
The monitor recommended turning that assumption on its ear: insisting that boorish patrons are a drag on Wynn’s excellent service, so of course they should be removed immediately. Moreover, that opens the door to Wynn developing a code of conduct for patrons, telling them they’re expected to follow a higher standard of class and behavior.
I bet that would work.
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