Why good governance matters to investors

What you'll learn on this podcast episode

Although governance may not be a flashy topic in the world of upstart entrepreneurs, overlooking it can cause billions of dollars of loss for otherwise savvy investors. In this episode of the Principled Podcast, host Susan Divers discusses why good governance matters with Bruce Karpati, partner and global chief compliance officer at the private investment firm Kohlberg Kravis Roberts & Co. (KKR). Listen in as the two explore how governance plays a crucial role in the way KKR selects its portfolio companies and manages them. 

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Guest: Bruce Karpati

Bruce Karpati – Grayscale

Bruce Karpati joined KKR in 2014 and serves as the firm's global chief compliance officer and counsel. Prior to joining KKR, he was the chief compliance officer of Prudential Investments, the mutual fund and distribution business of Prudential Financial. Mr. Karpati was previously the national chief of the SEC's asset management unit which he co-founded. In this role, he supervised a staff of 75 attorneys, industry experts, and other professionals. Mr. Karpati joined the SEC as a staff attorney in 2000, was promoted to branch chief in 2002, assistant regional director in 2005, and co-chief of the SEC's Asset Management unit in 2010. In 2007, he founded the SEC's hedge fund working group, a cross-office initiative to combat securities fraud in the hedge fund industry. Mr. Karpati also serves as an adjunct professor at Fordham University Law School. He began his career in private practice at Dechert LLP. Mr. Karpati earned his JD cum laude from the University at Buffalo Law School, and his bachelor's degree cum laude in International Relations from Tufts University. 

Host: Susan Divers


Susan Divers is a senior advisor with LRN Corporation. In that capacity, Ms. Divers brings her 30+ years’ accomplishments and experience in the ethics and compliance area to LRN partners and colleagues. This expertise includes building state-of-the-art compliance programs infused with values, designing user-friendly means of engaging and informing employees, fostering an embedded culture of compliance and substantial subject matter expertise in anti-corruption, export controls, sanctions, and other key areas of compliance.

Prior to joining LRN, Mrs. Divers served as AECOM’s Assistant General for Global Ethics & Compliance and Chief Ethics & Compliance Officer. Under her leadership, AECOM’s ethics and compliance program garnered six external awards in recognition of its effectiveness and Mrs. Divers’ thought leadership in the ethics field. In 2011, Mrs. Divers received the AECOM CEO Award of Excellence, which recognized her work in advancing the company’s ethics and compliance program.

Mrs. Divers’ background includes more than thirty years’ experience practicing law in these areas. Before joining AECOM, she worked at SAIC and Lockheed Martin in the international compliance area. Prior to that, she was a partner with the DC office of Sonnenschein, Nath & Rosenthal. She also spent four years in London and is qualified as a Solicitor to the High Court of England and Wales, practicing in the international arena with the law firms of Theodore Goddard & Co. and Herbert Smith & Co. She also served as an attorney in the Office of the Legal Advisor at the Department of State and was a member of the U.S. delegation to the UN working on the first anti-corruption multilateral treaty initiative.

Mrs. Divers is a member of the DC Bar and a graduate of Trinity College, Washington D.C. and of the National Law Center of George Washington University. In 2011, 2012, 2013 and 2014 Ethisphere Magazine listed her as one the “Attorneys Who Matter” in the ethics & compliance area. She is a member of the Advisory Boards of the Rutgers University Center for Ethical Behavior and served as a member of the Board of Directors for the Institute for Practical Training from 2005-2008.

She resides in Northern Virginia and is a frequent speaker, writer and commentator on ethics and compliance topics. Mrs. Divers’ most recent publication is “Balancing Best Practices and Reality in Compliance,” published by Compliance Week in February 2015. In her spare time, she mentors veteran and university students and enjoys outdoor activities.


Principled Podcast transcription

Intro: Welcome to the Principled Podcast brought to you by LRN. The Principled Podcast brings together the collective wisdom on ethics, business and compliance, transformative stories of leadership and inspiring workplace culture. Listen in to discover valuable strategies from our community of business leaders and workplace change makers.

Susan Divers: What do Sam Bankman-Fried, former wunderkind and CEO of FTX, and Elizabeth Holmes, the founder of Theranos, and now a convicted felon, have in common other than highly questionable business practices? The answer is a long list of respected first tier investors, including Sequoia Capital and Threshold. Although governance as a topic may not be as flashy as save the world for entrepreneurs, overlooking it can cause billions of dollars of loss for otherwise savvy investors. 

Hello and welcome to another episode of LRN's Principled Podcast. I'm your host, Susan Frank Divers, Director of Thought Leadership at LRN, And today I'm delighted to be joined by Bruce Karpati, a partner and the Chief Compliance Officer at Kohlberg, Kravis, and Roberts, one of the world's largest private investment firms with assets over 500 billion. We're going to be talking about good governance, which is a critical element integral to how KKR both selects its portfolio companies and how it manages them. Bruce is very experienced in this space, having helmed KKR's Ethics and Compliance Initiatives and Program for nine years. 

Bruce, thanks so much for coming on Principled podcast. 

Bruce Karpati: Thank you, Susan. 

Susan Divers: So Bruce, looking at some of the recent scandals such as Theranos, FTX, Wirecard, to name a few, it's striking how sophisticated investment companies and funds ignored significant red flags that were indicative of a lack of internal controls, unlawful actions, and sometimes outright fraud, and then they of course, suffered significant losses when those companies imploded. Is the investment community paying enough attention to the G in ESG? 

Bruce Karpati: Well, first thank you, Susan. It's great to be here, especially on such an important topic as governance. I'd say I can speak for KKR and governance is certainly a very important topic for us and our portfolio companies. In terms of governance, for me, that really does mean oversight and how we do it, and there's principally two ways I look at it. It's the oversight that we have in-house as an investment firm, and there's core components of that, like a culture of compliance, having the necessary resources, building an infrastructure of policies and procedures, and trying to be forward-looking. Really the second component is our role with portfolio companies in terms of our directors and their oversight and the role that the different functions that KKR play in making sure that our portfolio companies have the best practices in place. 

Susan Divers: It's clearly something that KKR takes very seriously, both for itself and then for the portfolio companies as well, and presumably when it's planning investments. How does that emphasis come about? Were there lessons learned along the way and what does it look like in practice, if you could take us into that world at KKR a little bit more? 

Bruce Karpati: First, it's really about leadership. As you said, I've been at KKR for over nine years, but the leadership at KKR, both the founders, Henry and George, as well as the co-CEOs, Joe and Scott, really have embedded a culture of governance at KKR and its portfolio companies. 

One of the sayings that we often say around here is, "People do business with those that they like and trust," and so a lot of it is about leadership as it relates to those qualities. Then of course, being able to escalate issues to senior people at the firm, then as I said earlier, having proper oversight in place. 

In practice, I do think that comes with having the mechanisms in place that allow you to do both the due diligence and monitoring of your investments. For example, we do a pipeline meeting with our colleagues from the public affairs, ESG, legal and compliance teams every week to look through the portfolio and to see if there's any reputational or compliance or regulatory issues that are in the pipeline. We make sure to share with our portfolio companies best practices as it relates to regulatory and compliance issues. We have our portfolio companies come in every year for discussions around best practices, and then of course, we work with advisors to make sure that the companies themselves are improving on their compliance programs. In practice, there's different aspects to this, but they all come together to make sure that we're providing proper governance. 

Susan Divers: It probably goes without saying, but given the process that you're describing, if you see opportunities where you can't mitigate risk, then presumably you walk away from those, is that correct? 

Bruce Karpati: Certainly, right, we consider before investing any reputational issues and to the degree that those reputational or regulatory issues are severe enough, we will not go forward with the investment. 

Susan Divers: What are the most common issues that you see on the investment side? 

Bruce Karpati: I'd say there's different categories. As you're well aware, the types of companies that we acquire and that we invest in are of all types, from smaller companies with not many employees to companies with thousands of employees. In answering this question, the issues can be of various types. I'd say some of the more common issues, as you can imagine, we're a global firm, and so making sure that the companies are in compliance with anti-corruption laws and basically there we're dealing with sanctions, we're dealing with FCPA, local anti-corruption law, and we're dealing with AML, and so that's one category of issues that we'll look at. In terms of companies that are just starting out, clearly they need to build a compliance program and have that in place, so we help them there. Then of course, in the history of a company, there will always be internal issues and we have to make sure that we come in and help the company investigate those issues if they arise during the time of our ownership. 

Susan Divers: That brings up the growth side. What are the typical issues, well, if there are typical issues, what are the common issues that you see in your growth companies over time in terms of evolving their ethics and compliance programs? 

Bruce Karpati: Yeah, I'd say one thing we do with the growth companies is we share best practices. Of course, when we go into a growth company, like any company, we're going to look at the state of their controls, the culture of their compliance, the tone from the top, see if there's any historical issues. It won't be that different from when we look at a larger company, but I'd say we work with them in making sure they understand the expectations around being a KKR-owned company and having a robust compliance culture and a robust compliance program. 

Susan Divers: Do you offer sort of hands-on help in terms of how they resolve them or is it mostly sort of coaching? How does that work in practice? 

Bruce Karpati: In practice, from the beginning of the investment, we institute a program with outside advisors where we look beyond the due diligence that we initially did at how are they doing with their compliance program? We will periodically monitor and check in with the company, and then we've also instituted some project improvement plans at selected companies. If there's issues or higher risks that we see, we'll work with our outside advisors to make sure that those companies are implementing a program. Then, as I said earlier, we periodically get together with our portfolio companies and share best practices and also have some of the portfolio companies share their best practices. As an example, just last week we did our annual regulatory and compliance workshop and our general counsel conference where a big focus was on culture and the culture of compliance and how to measure culture. Those are all the elements of how we try to help our portfolio companies. 

Susan Divers: That's certainly hands-on. It sounds like there's always a way for them to get help from you. 

We talked a little bit about how it can be difficult for companies to back away from cutting edge or exciting ventures, even if red flags are popping up, and our annual program effectiveness report shows that only 52% of our respondents this year said that ethics and compliance concerns had led them to modify a business initiative in the past year. Obviously you do walk away from investments that you can't mitigate risk, but how do you convince your business partners to make those choices? 

Bruce Karpati: That's a great question. I don't think it's about a matter of convincing, I think it is about reputation and how seriously people take reputational or regulatory issues that could impact KKR or the portfolio companies. The elements of that are making sure that the control functions have a seat at the table and are part of the process, which we are, and then of course, making sure you execute on that process. I talked a little bit earlier about that process, but making sure you're reviewing the investments before the actual investments happen, and then of course having mechanisms to escalate issues. I co-chair our Risk and Operations Committee, I'm also chair of our Conflicts and Compliance Committee, and on those committees we have business side investment professionals who are part of that escalation process. We have the infrastructure where we can escalate reputational issues and people will take them very seriously. 

Susan Divers: That's clearly a sign of taking things seriously if you have that kind of access and standing within the company. 

One thing I did want to talk about too is I heard you speak at the Tapestry Network about the relationship that you have with your audit committee and the board, and I was really struck by the very practical and holistic approach that your chair of the Audit Committee took to managing compliance risk. Could you talk about that a little bit? 

Bruce Karpati: Yes, and I'm fortunate to be supported by both a great board and Audit Committee, and that really comes down to a few aspects. One is being relationship-based. You have to make those relationships with the board members and the Audit Committee members and having the infrastructure, quarterly meetings where you report out to the Audit Committee on different topics and issues, being able to report out to the board, for example, I do an annual report on the state of compliance at KKR to the full board, and then just having transparency on issues so that the board and the Audit Committee are aware of those issues and the mechanisms for how you deal with them. 

Susan Divers: Bruce, I didn't include this in the initial list of questions, but do you think that the expectations for boards have really changed and gotten more serious in the area of ethics and compliance over the years? 

Bruce Karpati: No doubt, Susan. When I look, even in the last 10 years since I left the SEC, there has been a focus on boards and their oversight of compliance and compliance-like issues, for example, cybersecurity, ESG, risk. Certainly those expectations are high and are always evolving. 

Susan Divers: Well, thanks Bruce. Clearly this is a conversation we could be having all day, but we're out of time for now. Thank you so much for joining me for this episode. 

Bruce Karpati: Thank you. Really appreciate being here. 

Susan Divers: My name is Susan Divers, and I want to thank you all for listening to The Principled Podcast at LRN. 

Outro:   We hope you enjoyed this episode. The Principled Podcast is brought to you by LRN. At LRN, our mission is to inspire principle performance in global organizations by helping them foster winning ethical cultures, rooted in sustainable values. Please visit us at LRN.com to learn more. And if you enjoyed this episode, subscribe to our podcast on Apple Podcasts, Stitcher, Google Podcasts, or wherever you listen. And don't forget to leave us a review.


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