In the recently released Ethics and Compliance Initiative (ECI), 2018 Global Business survey, the study found that even the minimum standard of E&C implementation produces very encouraging results. Without question, they established that ethical behaviors in an organization impact the bottom line. They also found that adhering to any of the 15 operational standards of HQP they outline resulted in a dramatic return on investment.
The report clearly pointed out “that as the quality and strength of ethics and compliance programs increase, organizations see improvements in several key performance areas: the establishment of a stronger, more resilient culture, and a significant decrease in misconduct.” Consistent with these findings, employees demonstrated a tenfold increase in confidence and trust in the organization.”
However several key factors have to be put in place in most organizations in order to achieve measurable, positive results. We can “talk” culture all day long, mandate it, instill fear re firing, but if leadership is not an example and role model for ethical behavior… well it’s not going to happen!
If a company wants to promote and assure ethical standards are followed then transparency, trust and developing an ethical culture based on guiding principles are critical.
And to ensure transparency the board of directors needs to step up and hold leadership accountable. There is no question that “boards that prioritize corporate culture, watch for red flags and set clear expectations will encourage ethical behavior throughout the company.”
Granted, involved board members have a big job. With the duties of care, loyalty and obedience they also have to make sure the organization follows the law. They approve key contracts, hire and supervise the CEO and assure the organization is financially solvent, evaluating financial policies, approving budgets and revising financial reports. In today’s more complex business world, risk management and other factors are part of the equation.
However, while “Board members generally recognize their responsibility to oversee ethics and compliance,” said Pat Harned, CEO of the Ethics and Compliance Initiative, “What they struggle with, is to know what questions to ask and what information to look for. I don’t think directors are particularly well-versed in recognizing red flags.”
And, in my opinion, one “red flag” which should always be acted upon are any employee surveys responses that may indicate that employees are not comfortable reporting wrongdoing which they may have observed.
According to a Deloitte survey published in 2015, Board members recognize the importance of an ethical corporate culture and that it is driven from the top of the organization, with 87% considering culture and engagement a top challenge. But a 2016 Deloitte study found “that just 28% of executives said they understand their organizational culture and 12% thought their company was driving the ‘right culture.’”
The National Association of Corporate Directors (NACD) suggests that boards need to become just as disciplined in overseeing corporate culture as they are for risk management. A company may have a clearly stated code of ethics that all employees at every level must follow and ethical behavior is voiced, however, that’s not enough.
It is important that the board of directors ask tough questions of executive management, and the AICPA Audit Committee Toolkit for Public Companies lists many suggested questions to be asked at least an annual executive sessions.
Christy Pickering is a CPA who serves on the board of directors at Hancock Holding Co, which is one of the largest banks in the Southeast. Ms Pickering shares that “once a year the audit committee of the Hancock Holding board schedules a meeting with each of the top 10 or so executive officers. These are confidential sessions where executives are encouraged to speak about concerns, problems, and other potential warning signs.” The sessions range from 30 and 45 minutes and are flexible depending on participant’s availability.
And a 2017 Harvard Business Review article, How Boards Can Reduce Corporate Misbehavior, also encourages the asking of questions of executives. It said “As the ultimate guardians of the firm’s financial, human, and reputational capital, corporate boards need to set their bar higher, and replace reactive approaches to misbehavior with a proactive approach to winning with integrity. Instead of assuming everything is fine unless they hear otherwise; directors need to be more probing.”
The authors, Constance E. Bagley, Bruno Cova and Lee D. Augsburger also outline a comprehensive ten-step program to help boards reduce the risks of illegal behavior, reinforce ethical conduct as a core value, and enhance the company’s reputation—in the eyes of regulators and stakeholders—as a good corporate citizen, several of which include:
- Create an ethics committee of the board. Appoint a high-ranking chief ethics and compliance officer (CECO) to take day-to-day operational responsibility for the company’s global ethics and compliance program.
- Establish and post online ethical and compliance standards and procedures to prevent, detect, and remedy illegal or unethical conduct.
- Develop measurable integrity performance indicators, reward good behavior, and do not create misaligned incentives.
- Mandate interactive training to communicate the ethical and compliance standards.
- Make sure employees aren’t retaliated against for speaking up.
- Be prepared for compliance failures and ethical lapses (“predictable surprises.)”
Compliance training for boards of directors has recently increased in the wake of corporate scandals, with seventy-three percent of the more than 1,200 ethics and compliance professionals (surveyed globally by NAVEX Global) saying they are training their board members. This reflects a dramatic increase from the forty-four percent reported in 2017 and certainly indicates a heightened awareness of directors to be apprised of ethics and compliance risks. Yet, even more, is needed.
Boards have a responsibility to set expectations with management that regular assessments of culture will include qualitative and quantitative information and incorporate data from sources outside the organization. The National Association of Corporate Directors (NACD) suggests several recommendations that drive organizational culture, with clear oversight to prevent unethical behaviors. They advocate that the board, the CEO, and senior management establish clarity on the behavior they expect across the organization regardless of geography or operating unit, and they should develop concrete incentives, policies, and controls to support the desired culture.
One of their mandates states a company integrates culture into the board’s ongoing discussions with management about strategy, risk, and performance, emphasizing that the way results are achieved is as important as whether a given goal is met.
Ingrid Fredeen, J.D., Vice President, Online Learning Content, NAVEX Global says, “The most mature program leaders have moved beyond regulatory alignment and on to tackling ethics and compliance objectives through multiple channels with a broader approach…Organizations that implement ethics and compliance programs simply to check a box or comply with regulations miss an opportunity to take advantage of program capabilities that develop, nurture and maintain strong, positive organizational cultures.”
Pretty clear? Ethical behavior clearly outlined, that holds everyone within the organization responsible, including the board of directors, pays. In dollars and cents and reputation. How’s your organization doing?
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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
