Certainty in uncertain times


Financier Worldwide Magazine

November 2017 Issue

Every change in leadership brings uncertainty. How will the new boss lead? What will be most important? Which activities will drop in priority? What will it mean for me? Now more than ever, these are the kinds of questions that are being asked about the change in leadership of the US federal government.

Corporate leaders are among those who are wondering about the priorities of the new administration, particularly when it comes to its enforcement of white-collar and economic crime. While the number of headlines about corporate misconduct seems to be growing, it remains unclear how the enforcement community will respond. Yet there are early signs that we could be witness to a loosening of US enforcement for wrongdoing that occurs. There have been some notable examples, as outlined below.

First, Wall Street regulators have imposed far lower penalties in Trump’s first six months of office than the Obama Administration’s initial six months. Second, so far the Trump administration has collected about 60 percent less money in fines from companies for violating pollution-control regulations compared to the same period of the past two presidential administrations. Third, the only regulatory settlement this year has been Wells Fargo’s $185m settlement with the Consumer Financial Protection Bureau (lead regulator), the Office of the Comptroller of the Currency and the LA City Attorney (out of legal claims totalling $3.3bn). Fourth, the House of Representatives passed a bill in March 2017 that would substantially reduce private litigation by consumers against corporations, and another bill in June that could undo significant portions of Dodd-Frank.

It begs the question: how do business leaders identify priorities for their organisations during such uncertain times – especially with regard to ethics and compliance?

What do we know?

Regardless of the activities of the federal government, a few things are certain. Despite the fact that most organisations today have established codes of conduct to set out their policies and standards for workplace conduct, and even though most supervisors say that their employees are committed to ethical conduct, each year an average of 44 percent of workers at all levels say that they still observe at least one act that violates those standards or the law.

These levels of workplace misconduct have decreased by 25 percent since several prominent regulations have been enacted, namely Sarbanes-Oxley, Dodd-Frank and a number of industry-specific requirements for corporate compliance programmes. Prior to the passage of those regulations, as many as 55 percent of employees said they observe some type of wrongdoing in a given year. What has mattered is not that the regulations existed, but that companies established the systems and controls that are linked to the reduction of workplace wrongdoing. Those systems were prescribed by regulatory requirements and enforced when violations occurred. So, there is some reason to think that if there is a loosening of regulation, organisations are at higher risk for non-compliance.

That worry may be well founded. After all, the majority of these regulations were established as a result of corporate misdeeds. Sarbanes-Oxley did not exist until a rash of corporate scandals took place (Enron, Tyco and Comcast among them). Thanks to the financial crisis, the same was true for Dodd-Frank. Even Chapter 8 of the US Federal Sentencing Guidelines – the framework that has in many ways become the de facto standard for ethics and compliance programmes – did not exist until judges were in need of guidance in sentencing of corporations that had been convicted of a crime.

This begs a few questions. If the tides are turning and regulatory and enforcement efforts continue to recede, how should boards and other executives think about ethics and compliance in their organisations? Should they shout for joy and count the cost savings for lack of a need of internal controls? Or should they double down on their programmes for fear that if rules are relaxed, the risks will rise?

Double down

One need only think of Uber, Rolls Royce or Volkswagen to appreciate the need for boards and senior leaders to remain vigilant in insisting upon strong ethics and compliance programmes in the organisations they govern. In each of these instances, we have yet to see what will come from enforcement actions for alleged wrongdoing. But already we are witness to the significant reputational loss from which these organisations now need to recover. And sadly, directors and many other leaders in these organisations discovered far too late that their corporate compliance programmes and cultures were not what they thought them to be.

Our research has found that when an organisation has a high quality ethics and compliance programme in place, acts of misconduct are reduced by as much as 34 percent. These programmes include the following: (i) a code of conduct or other form of written standards; (ii) training employees on what actually constitutes corruption; (iii) risk assessment to determine areas of greatest exposure; (iv) systems for employees reporting or raising concerns; (v) protections for employees who take steps to report (internally or externally); and (vi) discipline for employees who violate the code of conduct.

These efforts must also be accompanied by a focus on building and sustaining a strong ethical culture in an organisation, too. Culture is not influenced by regulation; it is the result of several activities and commitments by management. These may include communication of a set of core values that are intended to guide employee decisions and actions, leadership efforts to consistently talk about the importance of integrity and to model the conduct they expect from the workforce, supervisors’ reinforcement of the core values and the messages senior leaders are communicating, encouragement and reinforcement that management wants employees to raise concerns and reports of suspected corruption, and systems to fairly and consistently investigate reports of wrongdoing and accountability among employees, regardless of the level, when they engage in corruption.

From a leadership perspective, it is easy to prioritise regulatory requirements and enforcement activities. Yet it is important for leadership to not lose sight of the importance of ethics and compliance programmes and strong cultures, simply on their own merits. They pay dividends as employee pressure to compromise standards is reduced by 76 percent, misconduct is reduced by 66 percent, employee reporting rises by 31 percent and retaliation against whistleblowers is reduced by 54 percent.

Additionally, employee engagement increases and their overall satisfaction with the organisation rises when high quality programmes are in place. All of these outcomes are well worth an organisation’s investment in ethics and compliance.

What to do?

Leaders should begin to think of their company’s ethics and compliance programme as essential to business strategy, regardless of what happens with regulation and enforcement. So how can they do that?

Communicate organisational values and standards. Multiple efforts should be underway to communicate the importance of organisational values and standards in everyday business activity. From the C-suite to the shop floor, regular messages should be sent that the values of the organisation are important and that there are resources available for employees who have questions. Communications should also emphasise that people who violate the standards will be held accountable.

Monitor employee perspectives of the organisational culture. Gather information from employees to gauge their perceptions of the workplace from an ethics and compliance perspective. When significant shifts occur, identify root causes and resolve any issues.

Encourage and protect employee reporting. When cultures begin to erode, employees stop reporting wrongdoing to management. Or if they do come forward to raise a concern about observed misconduct, employees in weakening cultures often say that they experience retaliation for having done so. This is a very serious risk to an organisation. Once retaliation begins to occur, there is a silencing effect overall. The worst thing that can happen is for the organisation to become a place where wrongdoing is taking place and employees are afraid to make problems known. We know from research that most employees raise concerns to their supervisors, so systems are needed to monitor that activity and escalate any serious reports of alleged wrongdoing. It is equally important to regularly review the investigations and disciplinary processes in place. Inconsistency or harsh treatment of employees who report wrongdoing can be perceived as retaliation.

Turnover rates. When employees are dissatisfied with their jobs, they leave the organisation. When the culture becomes toxic and trouble is brewing, they leave in droves. Ask management to provide regular reports of employee turnover, especially in key operations where performance pressure is higher. Upticks in departures could be a sign of high risk or non-compliant activity.

Perhaps most importantly, the message that ethics and compliance programmes and culture are important begins with directors and executives. It is their job to insist that management continually finds new strategies, better benchmarks or additional sources of information to satisfy the board that the organisation is aware of the observance of standards and the wellbeing of its ethical culture.

A high quality ethics and compliance effort will bring certainty in uncertain times.


Patricia J. Harned is chief executive of the Ethics & Compliance Initiative. She can be contacted on +1 (571) 480 4422 or by email: pat@ethics.org.

© Financier Worldwide


Patricia J. Harned

Ethics & Compliance Initiative

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