Driving culture – the role of the CCO

July 2021  |  COVER STORY | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

July 2021 Issue

The complexity of political, regulatory and supervisory pressures on companies means they cannot afford to neglect their compliance function. Culture and governance are essential, and the process starts at the top. To that end, one of the most important members of a company’s leadership team is the chief compliance officer (CCO).

The role and remit of the CCO have evolved considerably in recent years. The modern CCO serves an increasingly important function, with day-to-day responsibility for managing compliance and reputational risks. Today, CCOs have a hand in guiding corporate strategy and monitoring risks that may threaten business growth. A skilled CCO can drive the company’s culture forward and even create a competitive edge. According to Deloitte, 59 percent of companies now have a dedicated CCO, with 57 percent reporting directly to the chief executive or board.

Initially, the role of the CCO was to ensure that a company was in compliance with laws, regulations and policies, and this function was often managed by a lower-level individual in the organisation. But things have changed.

“Today, the CCO role has developed into a more strategic function in many organisations,” says Haydee Olinger, senior advisor at Barker Gilmore and former global chief compliance officer at McDonald’s Corporation. “While it has traditionally been viewed as a regulatory function, companies that realise the value of the compliance team are now leveraging this group to help anticipate changes in laws, mitigate business risks and assist in developing plans in times of crisis.”

Beyond this, a well-designed, efficient compliance programme tied closely to strategic goals and key risk areas can differentiate a company from its competitors. “Strong compliance programmes have become a way to build competitive advantage,” says William McKinnon, a consultant at Russell Reynolds Associates. “For example, a company with a stronger compliance programme and track record can leverage that reputation to win more business from partners to whom reputation is important.”

As such the CCO, as the head of the compliance function, can generate value for a business. “Modern organisations are waking up to the realisation that investing in compliance can help a firm be more efficient, avoid costly regulatory action and litigation, and as a result, become more profitable,” says Craig Foster, a partner with Thompson Hine LLP. “And it is not just theoretical – recent studies bear this out. This realisation is likely to only expand the role of the CCO and bring the individual into closer and regular contact with management. For example, we would expect thoughtful companies to bring the CCO in at the early stages of new projects and invite robust dialogue.

“In addition, armed with a closer knowledge of developments and operations within a firm, management will rely more heavily on CCOs to keep up with changes in law and regulation and provide proactive guidance on how such changes will affect the firm,” he adds.

Culture of compliance

One of the biggest areas of focus for CCOs is company culture. CCOs are often expected to drive the conversation around culture on behalf of the entire C-suite, expressing, reiterating and reinforcing corporate values. They need to put themselves at the forefront of cultural change.

While responsibility for culture is shared throughout the company – from the chief executive, to general counsel to human resources (HR), for example – ultimately the CCO oversees employees’ compliance with the code of conduct. The CCO is the face of the ethics programme and shapes employee behaviour.

“The robustness of the compliance function can be critical to help identify any disfunction or cultural concerns deeper in the organisation that need to be addressed,” says Mr McKinnon. “Ethics and the code of conduct are now commonly held within the purview of the compliance leader.”

Increasingly, a company’s culture is vitally important to its employees. A robust, ethical culture can reduce employee turnover, improve employee satisfaction and productivity levels, and foster a positive, healthy environment. According to Glassdoor, 77 percent of adults evaluate a company’s culture before applying to an open position. Although hiring and recruiting remains firmly in the hands of HR, the CCO can create a culture that attracts the right type of talent.

“Culture is more important than it has ever been in modern history,” believes Ellen Yaffe, a consultant at Russell Reynolds Associates. “With both globalisation and the generational shift from baby boomers and generation X to millennials, an organisation’s culture and its commitment to ‘doing right’ by colleagues, clients and community have arguably moved to the top of job-seekers’ motivations. If you do not have culture right, you will not be able to attract the best talent and may lose the talent war in general.”

Indeed, 82 percent of respondents to Deloitte’s 2016 Global Human Capital Trends survey believed culture is a potential competitive advantage. According to Gallup, companies could generate 33 percent higher revenue by creating a culture that attracts star talent. Selecting high-talent managers can lead to 27 percent higher revenue per employee than average, and selecting naturally talented individual contributors can add 6 percent higher revenue on top of that.

“The economic, social and reputational success of an organisation is strongly tied to its culture,” says Ms Olinger. “A good company culture is what makes an organisation stand out. Employees want to be proud of the company for whom they work or desire to work. This pride results in lower turnover, higher overall morale and a dedication to helping the organisation succeed.

“Customers are also influenced by a company’s culture and are loyal to businesses they feel are taking on social causes, such as Patagonia and Toms, for example, or giving back to the community, in the case of Karmagawa and Dilba Shoes, for example,” she adds.

A company’s culture sets the tone for the work environment and is a key factor in how employees feel about working for a business. For compliance to become a core aspect of any company’s culture, organisations need to provide adequate training to all employees. But beyond that, compliance should be embedded into everyday workflow, setting the foundation for individual behaviour across the organisation. The CCO, at the head of the compliance function, should ensure that new employees understand their responsibilities by having input into onboarding and training processes.

Qualities and characteristics

To achieve their goals and meet expectations, CCOs need certain qualities and characteristics to be successful. For example, they need to demonstrate strong commercial acumen and be solutions-oriented. “More than ever, stellar communication, influencing and leadership skills are at the top of the list of required competencies for a CCO,” suggests Mr McKinnon. “CCOs are often out in front of employees, regulators and other important constituencies.”

In recent years, regulatory agencies have voiced their expectation that a CCO be more than just a title. CCOs have shifted from compliance gatekeepers toward risk managers, particularly in organisations with international operations where their regulatory obligations are likely to be complex and varied. They now have a key role to play in making compliance part of a company’s corporate DNA.

As Mr Foster points out, the US Securities and Exchange Commission (SEC), for example, has emphasised that CCOs be competent and knowledgeable about securities laws, and empowered with the full responsibility and authority to create, implement and, perhaps most importantly, enforce a firm’s compliance policies and procedures.

“At the same time, firms, especially start-ups, have determined more to outsource the role of the CCO to third-party service providers,” notes Mr Foster. “From a regulator’s point of view, this seems to be an excellent way for new companies to hit the ground running on compliance, as they are able to access the wealth of experience of a seasoned CCO. However, the challenge in such cases is empowering individuals outside the organisation with the authority and responsibility needed to hold the entire company, including management, accountable,” he adds.

In Mr McKinnon’s view, the role of CCO requires simultaneous objectivity and partnership. “An overly punitive compliance function, or one that cannot navigate the grey areas of the regulatory landscape in a way that enables business success, will not survive,” he warns. “Compliance leaders must have accountability to risk and audit committees and executive leadership. They must have established a dialogue that is objective and transparent. The key is to inculcate a controls culture across the organisation while helping the business to safely move forward.”

Board support

Given the potential for fines and reputational damage arising from non-compliance, there is an onus on the CCO to ensure the company has the framework in place to meet regulatory requirements. Embedding the right culture is key. But to accomplish this, the CCO will need support from the top.

It is imperative that boards do not treat compliance as an administrative burden. “Boards set the right tone when they spend an appropriate amount of time on compliance and the CCO has ample board exposure and support,” explains Ms Yaffe. “The board needs to show they take compliance seriously, care, and are engaged in the initiatives. Clarity about board responsibility toward compliance is critical. Compliance oversight is often left to the audit committee alone. Who the CCO reports to needs to be well considered. Coordination between committees is key.

“Corporate culture can be perceived as too nebulous to influence at board level, but there is much that boards can do to oversee corporate culture,” she continues. “Boards should look for patterns of management weakness in hotline reports and employee survey data and require action plans be established.”

Importantly, no one can be above the rules. Company leaders, including the CCO, must practice what they preach. If a company’s leaders are seen to be cutting corners and bending the rules, employees may feel entitled to behave in the same way. Conversely, if the company’s leadership prioritises ethics and good behaviour, these values will trickle down to the workforce. “The board must ensure that management and employees understand that they do not view the compliance programme as a ‘check the box’ exercise, but rather a programme that can be used as a competitive advantage,” says Ms Olinger.

Tapping technology

The scope of challenges faced by modern CCOs is only likely to grow, given the rapid pace of regulatory change around the world, and the increase in liability for catastrophic compliance failures. To overcome the challenges, CCOs will need to establish credibility with regulators. They must demonstrate a strong understanding of how culture functions within their organisation, and what they can do to shape and lead it.

One area of burgeoning interest is technology. New solutions are being harnessed to help CCOs measure and evaluate culture, and to guide and reinforce compliance processes. This may include insights on how employees perceive the company’s culture and how they behave in line with its ethical values. The results offered by technology are more accurate than ever before.

While technology alone cannot create or change corporate culture, it can have a huge impact. Companies can utilise technology such as analytics, automation, artificial intelligence (AI), and other cognitive technologies, to augment human insights and judgment, and boost effectiveness.

Gamification – applying gaming techniques, mechanics, elements or experiences to a non-game setting, to motivate or engage people – can be utilised to improve training and onboarding, or to guide employees wanting to advance their careers, for example. This, in turn, can help recognise and reward employees.

The internet of things also offers companies opportunities to become more efficient and increasingly ‘green’. Smart systems can help reduce energy and building costs and foster a culture of sustainability, which can create the sense of a socially responsible culture. It also generates positive corporate PR which can attract prospective employees.

The COVID-19 pandemic has presented CCOs with a chance to increase digital uptake. With the prevalence of remote working, technology has a crucial role to play in compliance. It can be used to provide compliance tools and to ensure that policies and procedures are accessible and regularly communicated. Going forward, CCOs will need to acquire the digital skills to fully embrace the benefits of technology.

The role of the CCO has evolved in line with stakeholder and regulatory expectations. Today, the CCO is a vital member of the C-suite, charged with turning the compliance function into a dynamic, proactive force that safeguards the organisation and its reputation in an increasingly challenging environment.

© Financier Worldwide

BY

Richard Summerfield