How to deal with different motivations to shape an effective compliance programme
March 2019 | SPECIAL REPORT: MANAGING RISK
Financier Worldwide Magazine
March 2019 Issue
Perhaps one of the most elusive challenges in the design of an effective compliance programme is determining how to properly react to different motivations. Each motivation would ideally require a different answer. However, at first glance, such an approach does not seem to be viable.
What is the solution for such a dilemma? A two-step solution is proposed. First, identify the different motivations and, second, address them with a single strategy, without disregarding individual personalities.
The first step is quite a daunting task. The larger the organisation, the more diverse the drivers behind its members will be. These may be identified through a compliance risk assessment which does not necessarily need to be formalised – it may be performed as issue emerge. Grouping individuals into departments or teams may be a practical step in order to deal with the problem.
From an organisational perspective, there are two elements to be considered – the intention, either well-intentioned or ill-intentioned, and the level of information, again, either well-informed or ill-informed. Risking an oversimplification, Kagan and Scholz, in ‘The “Criminology of the Corporation” and Regulatory Enforcement Strategies’, have identified at least three basic prototypes of motivations, which are the amoral calculator, the political citizen and the organisationally incompetent. A fourth prototype, the irrational non-complier (put forth by Baldwin in ‘Rules and regulation’), may be added to these.
It is intuitive to assume that the amoral calculator predominates in a profit-orientated organisation. It is not difficult to find organisationally incompetent individuals – they may wish to comply with the rules, but their own disorganisation prevents them from doing so. Similarly, it is possible to find political citizens who are willing to comply with the law at all costs, regardless of any consideration of the costs. The irrational non-complier is not so easily identifiable, especially if one considers that firms aim to drive profits, and such behavior may bring serious financial consequences.
From a compliance perspective, the ideal solution would be to manipulate incentives to create a multitude of political citizen individuals. From a realistic perspective, one should focus on amoral calculators because they carefully compare the cost of compliance with the cost of non-compliance.
The second step consists of using the reponsive regulation theory and the ‘benign big gun’. In relation to responsive approaches, the ‘benign big gun’ provides a comprehensive guideline for obtaining compliance from individuals. According to Parker, Braithwaite and Stepanenko in ‘ACCC Enforcement and Compliance Project: Working Paper on ACCC Compliance Education & Liaison Strategies’, the theoretical framework was originally used as a stragegy for regulators to maximise results in relation to regulated companies, but it can be used in the relationship between compliance officers and individuals within an organisation.
What does reponsive regulation theory advocate? The approach requires a more sensitive compliance officer, since it is not purely based on rules. Replacing the easy and simple unilateral commands of policies with interactive relationships, tailor-made to individuals, is said to “economise motivation, not just virtuous motivation”. Accordingly, it does not rely on ‘virtuous citizens’ because the “guns are ready to be fired” – of course, a wide range of sanctions should be available, including extreme ones. Nor does it undermine virtue, as a ‘big gun’ is kept in the background, or rely on economically rational actors because “a variety of forms of persuasion are available”, suggest Ayres and Braithwaite in ‘Responsive regulation: transcending the deregulation debate’.
The first premise behind the ‘benign big gun’ is to understand what motivates individuals. The answers vary and any attempt to generalise will be flawed. Economic rationality is not always present in the decision-making process of individuals: some will disobey the law even if it costs more than obeying it. Moreover, an individual who obeys the law in one situation may disobey it later the same day.
In order to tackle the multiplicity of factors behind different people, using game theory is insightful. ‘Tit-for-tat’ (TFT) and even the hypothesis of ‘vindictive tit-for-tat’ (VTFT) can be tailored to various proceedings, advancing the best response of a compliance officer to the actions of individuals. From this perspective, continuous interaction enables a compliance officer to foresee the actions of employees and then decide on his or her course of action.
The second premise of the ‘benign big gun’ is the use of enforcement pyramids. The first type of pyramid is formed by layers of sanctions, ranging from the less severe to the more severe, for example from mere warnings to dismissal and civil prosecution by the organisation. Cooperation will be achieved more easily when the compliance officer can escalate sanctions as a response to an employee’s resistance. The idea is to move from compliance to deterrence and when the latter fails, to incapacitate, suggest Parker, Braithwaite and Stepanenko. Also, the pyramid must have a comprehensive range of sanctions so that each violation is neither over-punished nor under-punished.
The other pyramid consists of layers of strategies, ranging from less interventionist to more interventionist, for example from spontaneous compliance to a top-down approach in the organisation. Ayres and Braithwaite argue that the arrangement needs to be flexible – the compliance officer must have powers to act according to the prescriptions of TFT and VTFT so that he or she can learn what the appropriate level of sanction and intervention would be over a period of time.
The bigger the stick carried by the compliance officer, the more credibility will be afforded to their opinion and the less they need to use their powers. Hence, as Ayres and Braithwaite put it, compliance officers can ‘speak softly’. The existence of ‘super-punishments’ can also facilitate cooperation from individuals. Based on this hypothesis, the expression ‘benign big gun’ emerged.
As part of this strategy, the ‘invincibility’ of the compliance officer should be taken into account. The reputation of the compliance officer can determine the behaviour of individuals. If the compliance officer always ‘loses’ in compliance-related decisions, there will be an incentive for individuals to challenge any decision contrary to his or her interests – once again, the tone at the top plays a key role. Furthermore, punishments should be used within their own appropriate criteria so that, as Ayres and Braithwaite suggest, the willingness to cooperate is not compromised.
Why should the motivations of individuals be understood? One of the keys elements for the strategy is to identify the motivation of individuals and react accordingly. Speak differently to those who behave differently. It is not an easy task, even in small and homogeneous groups. Also, even the most comprehensive models often ignore the fact that individuals change their opinions over time and may have ulterior motives.
Although the theory fails to predict when these prototypes are expected to appear, it proves that “reliance on any single theory of compliance is likely to be wrong, and when translated into an enforcement strategy, it is likely to be counterproductive”, according to Kagan and Scholz. Building on the pattern that recognises the complexity behind individual motivations, Ayres and Braithwaite developed the idea of using different enforcement strategies with the two pyramids. They argue that one person can have different motivations according to his or her position. The same happens within a big company. An amoral calculator can turn into a political citizen. Ayres and Braithwaite explain that an irrational non-complier decides to behave with responsibility like an organisationally incompetent individual, but fails to comply with the rules due to his or her lack of knowledge.
In an ever-changing scenario, Ayres and Braithwaite submit that as a part of responsive regulation, TFT would be the most appropriate regulatory strategy. Not that the resulting strategy is dependent on the psychological profile of the individuals. On the contrary, responsive regulation is quite malleable, so as to adapt itself to any of the motivations the regulator may face.
In conclusion, by following the suggested framework, each motivation would be handled different as they surface. Despite the initial impression, such an approach is viable and can be implemented within businesses.
Leopoldo Pagotto is a partner at FreitasLeite Advogados. He can be contacted on +55 11 3728 8100 or by email: firstname.lastname@example.org.
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