Reparation and redress: ethical solutions to graceless governance


Financier Worldwide Magazine

October 2017 Issue

The extent to which ethical behaviour correlates with profitability has been the million dollar question for businesses since time immemorial, with no easy answer. To put it another way: is good ethics good business?

In this regard, if the revelations pertaining to Uber and CenturyLink in recent months are anything to go by, alleged bullying and sexual harassment in the case of the former and allegations of unauthorised charges made to customer accounts with the latter, ethically dubious business practices seem to be no barrier to achieving success.

By no means isolated cases, the alleged actions of both is worthy only in the respect that it throws the spotlight on corporate governance as a thorny issue, as well as picking apart the notion that behaviour of this type is par for the course in business. Indeed, there is now considerable consensus that behaviour of this ilk has been allowed to go unchecked for too long.

But times are changing. According to a ‘National Business Ethics Survey’ (NBES) carried out by the Ethics and Compliance Initiative (ECI), the attitude to ethical behaviour differs markedly between Generations X and Y and Baby Boomers, with the later generations less tolerant of misconduct that is misleading (such as that exhibited by Volkswagen) or fraudulent (as in the case of Wells Fargo). As a consequence, reputation risk is often costlier to companies than the fines or penalties imposed by regulatory bodies.

“Without question, organisations and organisational behaviour is more closely scrutinised today than ever before,” affirms Dr Patricia Harned, chief executive of The Ethics and Compliance Initiative (ECI). “The scrutiny comes from both regulating and fining authorities, but also from the general public. Social media has greatly increased consumer awareness of corporate activity, both good and bad.”

Clearly, as far as the aforementioned companies are concerned, as well as many others across the globe, attention to governance, ethics and compliance was severely lacking. In addition, what these examples make abundantly clear is how important an effective ethics and compliance programme can be in fostering a culture of integrity that can shield a company from becoming ensnared in damaging scenarios.

Ethics failure

Uber and CenturyLink are hardly alone in the dubious ethics and graceless governance department. How then can we gauge the extent to which companies are failing to give due care and attention to their ethics and compliance responsibilities?

“Corporate culture is not priority one for companies and many are falling short of their ethics and compliance duties,” says Harlan A. Loeb, global chairman of crisis & reputation risk at Edelman. “Most compliance and ethical breakdowns are directly linked to rules-based systems that are doomed from the outset because compliance obligations and ethical challenges do not fall cleanly within the ambit of rules and regulations.”

For Nick Hawke, head of governance, risk and compliance at Lysis Financial, the enhanced regulatory requirements and increased focus on ethical behaviour introduced following the 2008 financial crisis has resulted in a reversal of much of the reputational damage incurred at that time. “These increased regulations were brought about due to the failings within the financial services sector – failings that were a direct result of unethical behaviour and non-compliance with regulatory requirements,” he recalls.

Since then, revised regulatory and ethical requirements have been enforced with significant focus and accountability being placed on senior managers – industry and regulatory intervention that other industries have been imitating to improve their own ethics and compliance behaviour.

Moreover, the major revisions that have been made to how executive misconduct and ethical breaches are reported means that many more companies are now that much more alert to the criticality of attending to ethics and compliance issues. That said, Dr Alexander Stein, founder and managing principal at Dolus Advisors, holds the view that “while paying attention to ethical breakdowns is demonstrably better than irresponsibility, neglect or dismissiveness, it is insufficient by itself”.

“Most organisations are less well-prepared than they think, want or should be for mitigating or effectively responding to the risks associated with misconduct arising from ethical lapses,” says Dr Stein. “There are many reasons why. The most common is a fundamental under-appreciation of the complex underpinnings of ethics, how fungible they can be and, consequently, how and why people might slide down a slippery slope, exercise poor judgment, fail to foresee the unintended negative consequences of their actions, or otherwise uphold mandated levels of integrity and professional conduct. Ethics transgressions are self-inflicted human problems which happen to occur in a business setting.”

Core components

Needless to say, a great many companies publish ethics and compliance guidelines, many of which run along similar lines. However, an element these ground rules often fail to adequately address is company culture and the impact this has on the behaviour of individual employees.

“The key component of a successful ethics and compliance programme is culture,” stresses Mr Hawke. “Having a firm-wide ethical focus can only be achieved by leadership from the board down. With senior managers leading the way on ethical issues and having compliance accountability being directly linked to remuneration, a firm will start to see a shift in the attitudes of employees which will result in increased compliance and an increase in ethical standards.”

Reputation risk is often costlier to companies than the fines or penalties imposed by regulatory bodies.

To achieve strong and effective ethics programmes that provide both an aspirational and directional tone, many companies utilise what is known as an ‘ethical culture audit’ – a process designed to identify and evaluate gaps in ethics and culture alignment.

Overseen by the board, the process is typically a blinded employee survey that asks a number of questions. Are the values of the firm clear and actionable? Is leadership committed to ethics and values and, if so, how is it manifest through the culture of the firm? Can misconduct safely be reported? Is the executive team held accountable for misconduct and impropriety? Are employees empowered and incentivised to make independent and unilateral decisions? “According to several surveys, compliance programmes anchored on behavioural ethics spend almost 40 percent less on regulatory and compliance costs than those with strictly rules-based systems,” attests Mr Loeb.

Despite such cost reduction success, there are likely to be few ethics programmes or functions, if any, that cannot benefit from being refined and updated periodically. “Corporate ethics, culture and governance are not waiting for a cold-fusion moment,” says Dr Stein. “Rather, the most significant factors are the most elemental: people. Organisations are communities, micro-societies and subcultures of people. Of course, robust and effective ethics and compliance programmes need sensible, clearly articulated, achievable guidelines and policies correlated to foster commercial growth, not just straightjacket against wrongdoing. But these must be grounded in a sophisticated expertise-driven understanding of the nuances and complexities of human psychology and group dynamics.”

The training function

A recent study by the ECI – ‘Ethics and Compliance Training: What Gets Results’ – highlights the importance of the training function in fostering a corporate culture that positions ethics as a valuable tool in aiding business success, as well as the efficacy of different training methods.

“The study notes that training is integral to the creation and sustaining of a strong corporate culture,” says Dr Harned. “Employees respond better to facilitated training that is engaging and interactive.” In addition, the study lists a range of benefits that training brings, including changing ethics-related behaviours, preventing future misconduct and an increased awareness of relevant laws, regulations, policies, procedures and standards.

“It is important to note that the visible presence of senior leaders during the training process – live or by video – makes training more influential and effective,” adds Dr Harned. “Those surveyed stated that the involvement of senior leaders was a powerful messaging tool in establishing ethics and compliance as an important part of their company’s culture.”

The effectiveness of ethics training, according to Geert Vermeulen, chief executive of ethics & compliance management & consulting (ECMC), is largely due to how well it is structured. This, he feels, is essential and needs a company’s ethics & compliance officer (ECO) to think carefully about. “How does training address the right people in the right way?” he asks. “How do you ensure that they actually learn and remember? How can you make the training attractive, fun and interactive? How often should it be repeated and what media should be used?”

Given the gravity of the consequences of unethical corporate behaviour, the days when training consisted of a lawyer giving a boring PowerPoint presentation that contains the exact content of the law should really be over, says Mr Vermeulen. “Rolling out off-the-shelf training is usually not efficient in a high-risk arena such as ethics and compliance,” he suggests. “It is important that employees practice how to deal with dilemmas that they may actually be facing in their day-to-day work.”

Values-driven, scenario-based training

Building a compliance culture moored on behavioural ethics and employee empowerment must be values-driven, according to Mr Loeb, guided by experiential design principles that drive robust ethics training. “Training that includes lecturing and one-dimensional information transfer is a waste of time and offensive to employees,” he says. “But scenario-based training that combines group exercises with tangible presentations on recommendations and solutions has proven highly effective. These exercises should include value-tensions that will spur constructive conflict and strong differences among the participants to evaluate the full spectrum employee capacity for critical problem solving as well as the natural differences in the behavioural psychology exhibited by the participants. Done well, these training exercises not only fortify ethics cultures but they also enrich commercial performance.”

Complementing a values-based approach to ethics training is the role that decision making plays, specifically the processes which inform and precede the action taken. “Training is one proportional instrument in an array of tools organisations can draw from to develop and sustain compliance-oriented operations,” explains Dr Stein. “Many companies overestimate what training can accomplish and are then blindsided when incidents occur. Articulating values, codes of conduct and expectations for integrity are important. But effective ethics and compliance training should not focus on mechanistic restrictions, such as legislating, prescribing, proscribing, intimidating, dictating and policing. Rather, high-quality training will help staff understand the principles and rationales governing acceptable and ethical behaviour and, crucially, sharpen and amplify their capacity to make better decisions.”


To what extent then should a company be expected to behave ethically as it travels the road to success? Furthermore, with regulatory, political and social pressures on miscreants increasing, how is the wider attitude to unethical corporate behaviour likely to develop in future?

“Firms that do not comply with general social and economic expectations in regard to ethical behaviour will be left standing by those that do,” believes Mr Hawke. “The financial services industry in particular has been forced to change attitudes and activities relating to unethical and non-compliant behaviours. Whilst this industry has struggled historically from a compliance and ethical perspective, regulation which has recently come into force has had a positive impact. Other industries are surely going to follow suit with an increase in regulation and personal accountability becoming ingrained within corporate behaviour.”

Ethical corporate behaviour is essential and, as companies are increasingly less able to shuffle things under the carpet, it will be even more important in the future,” suggests Mr Vermeulen. “Research shows that the general public is losing trust in public institutions and private enterprises. Economic models show that countries are wealthier and happier when there is more trust in society. We need to turn this around for society as a whole. On a company level, misbehaviour will not only generate company fines, individual jail sentences and reputational loss, it will be easier for ethical companies to attract higher level or better skilled employees.”

Ethical solutions: the rub

For many ethics practitioners, the best argument for investing in ethics and compliance programmes is the increasing amount of evidence showing ethical companies generating more business in the long term. A company can introduce as many hard-hitting programmes and policies as it sees fit in the search for an effective ethics and compliance solution, however, if its culture is out of sync with its ethical aspirations, then all the hard controls in the world are not going to prevent myriad types of misbehaviour occurring.

“Attitudes toward ethical corporate behaviour will always suffer from the gap between the ‘stated commitment’ and the ‘practiced commitment’,” admits Mr Loeb. “But as more firms see the compelling data on the basic utility of ethical cultures in terms of performance, cost reduction, innovation, creativity and a variety of other metrics, boards are taking notice of their governance responsibilities on building ethics cultures as their own reputations are beginning to weigh in the balance.”

Going forward, if the corporate world is ever to negate negative perceptions and rid itself of the stains left by grubby ethics and graceless governance, then the adoption and practice of a sound code of ethics has to be considered an obligation, rather than a choice.

© Financier Worldwide


Fraser Tennant

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