This article was republished with permission from Tom Fox’s FCPA Compliance and Ethics Blog.
The indictments earlier this year of executives from Takata and Volkswagen roiled many in the business world and ethics and compliance arena. Coming on the heels of the Wells Fargo scandal, one might wonder how corporations can stop the clear ethical lapses that led to these corporate disasters. Let us assume that these corporations were not headed by the type of crooks that led Houston-based Enron or WorldCom or any of the other corporations laid low by the accounting scandals of the early 2000s.
Interestingly, there was an article in a recent Harvard Business Journal online publication by Christopher McLaverty and Annie McKee, entitled “What You Can Do to Improve Ethics at Your Company,” which I recommend to every compliance practitioner. The authors surveyed C-suite executives and noted, “More often the dilemmas were the result of competing interests, misaligned incentives, clashing cultures.” Based on this study and their prior work, the authors noted three major obstacles to ethical behavior.
The issue of corporate change. The authors stated, “Companies can warp their own ethical climate by pushing too much change from the top too quickly and too frequently. Leaders in the study reported having to implement staff reduction targets, dispose of big businesses in major markets and lead mergers and acquisitions. Some of these activities included inherent conflicts of interest; others simply caused leaders to have to act counter to their values (loyalty, for example). Many leaders felt poorly prepared for the dilemmas they faced and felt compelled to take decisions they later regretted.”
The age-old dilemma of compensation where incentives tended to drive certain behaviors or, as the authors stated, “People do what they are rewarded to do, and most leaders are rewarded for hitting targets.” Of course, the most recent example is Wells Fargo, where employee compensation was based solely on the number of accounts opened. Yet such incentive-based behavior was not limited to front-line employees. As the authors stated, “The lure of incentives [is] a problem in boardrooms too: Bonus payments and executive share schemes are often based on short-term business metrics, which can be counter to long-term success.”
Finally, cross cultural differences, an area that may require a Chief Compliance Officer or compliance practitioner to think through several different calculi. Obviously, some countries have gift-giving cultures, but this is more than simply the value of a gift to give at Christmas; it involves cultures where gift-giving may be a part of the overall business relationship. The authors cited examples such as “closing a sales office in Japan, breaking a verbal promise made during after-work drinks in China or ignoring ‘sleeping’ business partners in a Saudi Arabian deal, all of which have cultural and ethical components.”
An interesting insight was teaching employees how to understand what matters in an organization. This is not simply the written codes, but how things really work. The authors posited three questions:
- How are employees paid? Obviously, a compensation plan is a critical benchmark. If it is solely based on “eat what you kill,” focusing on the short term, it may presage problems down the road.
- Who gets promoted and why? This is not simply whether the high producer gets promoted. How about those who speak up and raise ethical issues? Are they subtly (or not so subtly) discriminated against or held back from promotion?
- How do employees feel about their organization? Although it seems straight-forward, if your employees are disengaged or – worse yet – ashamed of your company, you might have an ethical time bomb waiting to happen.
The authors then turned to initiatives the interviewees had successfully used in their own organizations to improve the ethical climate. While noting there is some importance in the corporate governance documents, such as a code of conduct and policies and procedures, the authors averred, “Companies become ethical one person at a time, one decision at a time.” This means employees need to understand their organization’s underlying culture. They stated, “Self-awareness enables you to build and strengthen that inner compass. Organizational awareness enables you to identify the forces in your company’s culture and processes that could drive you and others to do the wrong thing. You also need emotional self-control: it takes courage to step away from the crowd and do the right thing.”
To have such courage, the authors noted many employees who did speak up have a personal network that can operate as “an informal sounding board and can highlight options and choices that the leader may not have considered. When making ethical decisions, it’s important to recognize that your way isn’t the only way, and that even mandated choices will have consequences that you must deal with.” This is yet another reason for the breaking down of silos in a corporate organization, because “the challenge is that most leaders have networks full of people who think and act like them and many fail to seek out diverse opinions, especially in highly charged situations. Instead, they hunker down with people who have similar beliefs and values. This can lead to particularly dire consequences in cross-cultural environments.”
Finally, and perhaps most intuitively, is the importance of speaking up. Here, business leaders must encourage not only a “speak up” culture, but also one of no retaliation. But it is more than this, as Vanessa Rossi, FCPA Due Diligence Counsel at Baker Hughes Inc., noted in a panel discussion to the Greater Houston Business and Ethics Roundtable; it is more tone at the top, as for many employees, senior leadership resides in the form of their direct manager. The authors phrase it like so: “If you find you need to speak up, there will be a number of choices to be made. Do you talk to the boss? Consult with peers? Work with advisory functions such as legal, compliance or human resources? You can draw on your personal network for support and guidance on the right way forward within the context of your unique situation.”
Ethics and compliance blend together in the corporate world. It is not just the responsibility of CCOs and compliance practitioners, but also senior managers to support those employees who want to do the right thing. While written protocols are significant in both detection and prevention, one should never lose sight of a corporate culture as a way to positively impact your workforce and company going forward.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business advice, legal advice or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The author gives his permission to link, post, distribute or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.
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