Is your culture still a risk factor?

October 2016  |  SPOTLIGHT  |  RISK MANAGEMENT

Financier Worldwide Magazine

Shortly after the Enron, Tyco and WorldCom scandals of the early 2000s, extensive new regulatory regimes were put into place, such as Sarbanes-Oxley and a bolstered Foreign Corrupt Practices Act and anti-bribery legislation. Were they effective? Did behaviour inside organisations change? Now, 15 years later, we get VW and the diesel-emissions scandal, potentially one of the costliest business scandals in history. Why? What have we learned? Are the myriad rules, processes and procedures not working?

Part of the problem is that the global business community, and those that regulate it, are looking at the problem through the wrong lenses. Corporate misconduct is not a problem that can be solved through external regulation or intervention. If misconduct continues it is not necessarily due to faulty training or messaging. Misconduct is an outcome of the inherent tension when humans are working toward meeting business goals.

This is a point worth stopping and pondering for a moment – ethics and compliance problems result from failed business strategy execution. Most ethics scandals do not start off as fraudulent ventures intent on ripping off customers or shareholders. The fraud usually happens later when the cover-ups begin. So where do scandals actually start? The first steps down the slippery slope usually start in management meetings where tough issues are being discussed, decisions are required that might require trade-offs of various positions in order to reach a consensus on how to meet a goal. Under pressure to meet deadlines or goals, many ideas are circulated, some safe, and some outrageous. In the spirit of brainstorming options, all ideas are good. But what is going on inside conference and boardrooms that allows outrageous and risky ideas to become accepted policies?

Think about a recent list of scandals – VW faking diesel emissions standards, BP safety lapses in the Gulf, Wal-Mart ‘expediting fees’ in Mexico. All of them started as legitimate business planning that went awry.

VW, for example, was seeking ways to aggressively gain greater global market share. In 2010 leadership announced plans to more than triple its sales in the US within 10 years – a key element of its global plan to pass Toyota and become the world’s largest automaker.

But when the costs and convenience of existing diesel emission technology options needed to meet higher US standards were not feasible, leaders and engineers went to extreme measures and were not held back or dissuaded by senior leaders.

So if the start of a scandal is benign, and if ethics and compliance programmes geared toward addressing misconduct or providing positive reminders to do the right thing are seen as irrelevant to the problem at hand, what approach should leaders take to keep ethics risks within acceptable parameters?

Misconduct can be considered like cells in your body that become cancerous. At first the cell is healthy. But then when there is an issue (as there always is) does the organisation have the means to nip it in the bud early before it grows into a problem? Almost all ethics scandals start in small conversations that can be easily squelched before it ever becomes a problem. It is the organisations that do not have healthy immune systems that are vulnerable to the problem growing out of control.

How to mitigate the risks?

While the details and specifics of an ethics risk mitigation strategy are unique to each organisation, the steps outlined below provide the parameters to guide leaders.

First, leaders must be willing to focus beyond ‘ethics and compliance’ as a solution. Leaders, both line managers and finance and compliance leaders, need to go beyond merely telling employees what behaviour is needed. Employees already know and want to do the right thing. Instead, leaders must understand the dynamic that causes business decisions to go awry in the first place – it is not effectively channelling and challenging the way in which decisions are allowed to become distorted as they grow without controls.

Second, leaders must understand the relationship of their organisation’s strategy with the behaviours needed across the enterprise to achieve those goals, as well as the role of the organisation’s culture in supporting or thwarting those objectives. The probability of successfully achieving a business objective is determined by the positive interaction of strategy, behaviour and culture.

Each of these dimensions has a two way relationship with the other elements – at the start, leaders will look at the strategy that they have adopted to meet the organisational objective. When they start to look at the success or challenges in meeting that objective, they may begin to evaluate the obstacles or resistance factors that they are facing. When leaders look at behaviour, they are often asking whether or not employees and managers are willing to take the risks needed in order to explore new areas and to achieve new objectives. However, leaders may not be as sensitive to understanding whether or not they may be generating the very fear that is holding back their employees.

How does culture play a role in influencing the evaluation of whether or not employees are fully engaged in executing the strategy? Employees will always be at the edge of addressing fears as they pursue stretch goals and new areas that are outside of their comfort zone. The ability of the culture to support them by giving them confidence as well as give them the tools to address fears will create the environment that will free them to be willing to take risks. Therefore, leaders who are looking to effectively execute a strategy must look both at the impact of their decisions on behaviour as well as the impact of their decisions on the culture.

Third, leaders must acknowledge that because everyone in the organisation is human, everyone is vulnerable to basic fears that can hold us back and begin the process of rationalising our actions – which is where, if there is going to be trouble, it definitively starts.

Three types of fears are at the core of virtually all ethics and culture-based risks. First, fear of loss – whether it’s one’s job, or tremendous financial gain, the fear of losing something of value can lead to rationalisation that one had to perform the actions they would later regret. Second, fear of losing face – we are social animals, we will conform to the group’s wrong decisions, or fail to speak up if we fear being singled out and potentially ostracised. Third, fear of losing control – many leaders will often put their own personal brand ahead of the company’s. Or they might fear that if they do not always act like the one with all the answers, they will lose respect and position. This fear can lead to the blinders of not wanting to hear bad news from employees.

If these fears are at the core of any potential ethics trouble, what tools are available to help the organisation mitigate the risks?

The focus needs to be on how decisions are made in the first place. Leadership need to hone in on what generates the risk, not the action. Spend less time reminding people to do the right thing and reiterating the costs to them and the organisation of violations. They get that. Spend more time on what will prevent the problem in the first place.

There are three core elements that will yield the biggest return. First, commitment – employee engagement is seen as a strategic foundation and not a ‘nice to have’. Engaged employees will be willing to take personal risks to go out of their comfort zone to ask questions and have a sense of collective ownership so that inappropriate conduct will be seen as unacceptable. Second, integrity – perceptions of inconsistency and unfairness are the quickest paths for employees to shut down their sense of commitment and focus only on themselves. Leaders must be held accountable for their actions and must hold others accountable for theirs. Third, transparency – nothing will yield better results faster than ensuring that every employee has the ability to speak up and ask tough questions. Leaders must recognise that what had been seemingly innocuous behaviour of managers in not truly creating an open door environment is actually one of the most dangerous, but yet manageable risk factors.

To truly create an ethical culture, leaders must change their focus and begin looking to the root causes of misconduct. Prevention by addressing the behaviours that create the climate where misconduct can arise is the highest return on investment of ethics and compliance efforts.

David Gebler is the president of Skout Group LLC. He can be contacted on +1 (617) 314 6280 or by email: dgebler@skoutgroup.com.

© Financier Worldwide

BY

David Gebler

Skout Group LLC