Misconduct and unethical behaviour can occur at any time. Despite the best efforts of businesses to educate employees and stamp out non-compliant behaviour, malfeasance is an ever-present threat for many companies.
Of course, there are many reasons why companies compel their employees to act ethically. Doing so can have a positive effect on a company’s performance and success. There are also potentially serious implications for companies that do not maintain compliance, such as financial loss, reputational damage, safety concerns and customer backlash.
Companies need to understand why unethical behaviour remains prevalent in 2020 and how they can address the challenge – particularly from a financial risk standpoint in the wake of the COVID-19 crisis.
Historically, companies were not as focused on ethics and compliance as they should have been. In recent years, however, issues such as enhancing corporate governance, increasing regulation, raising industry standards and building better business cultures became more prominent.
A company’s culture will determine whether its rules and procedures are followed or ignored. In companies where a scandal occurs or malfeasance is detected, leaders and managers have often failed to take responsibility for building an ethical culture.
According to LRN Corporation’s May 2020 report, ‘Confronting the Root Causes of Misconduct’, only 46 percent of ethics and compliance professionals say their organisations’ senior leaders support effective sanctions or penalties on senior executives and high performers who are involved in misconduct.
Further, thirty-seven percent of respondents believe that their organisations takes ethics into account when setting sales targets or goals. Fifty-six percent believe that their organisation requires ethical conduct to be evaluated when deciding on employee bonuses. Thirty-nine percent say their company takes ethics into account when hiring managers and executives. And just 44 percent say their organisation involves the ethics and compliance function when doing due diligence for mergers and acquisitions (M&A).
In ‘ordinary’ times, companies often attempt to understand the conditions which lead employees to act unethically and devise strategies to mitigate misconduct. However, the COVID-19 crisis has disrupted standard operating procedures.
Certain governments and regulators have recognised the need to unburden businesses affected by the pandemic and relaxed a number of rules and expectations in recognition of the unprecedented challenges businesses and workers now face. However, this relaxation should not be interpreted as carte blanche for companies to ignore rules and act unethically.
As Andrew Gordon, global forensic and integrity services leader at EY, notes: “Fraud risk factors increase at a time of crisis because companies and individuals face more financial pressures, the opportunity for fraud increases if key internal controls weaken, and people find it easier to rationalise their actions. All fraud requires these three elements – opportunity, pressure and rationalisation – to be present (known as the Fraud Triangle). COVID-19 offers all three and more.”
The long-term implications of unethical conduct during this unprecedented, chaotic time may be significant. Once the economy returns to something approaching normal, organisations may be held accountable for their regulatory and compliance failures during the crisis.
Therefore, complying with regulations and ensuring employees act ethically has never been more important. Regulators will take a dim view of companies or individuals who attempt to capitalise on the disruption. The reputational damage of being investigated for malfeasance could be substantial.
Going forward, companies’ policies and procedures will need to be adapted in line with the ‘new normal’ created by the pandemic. For many organisations, this will require them to go back to basics.
One of the biggest challenges facing companies is employee oversight. Remote working has become widespread out of necessity, with Deloitte suggesting that during the crisis, around 50 percent of people who are employed or self-employed have been working from home. Though many will return to the office eventually, that number is unlikely to reach pre-COVID-19 levels.
The practicalities of remote working has impinged on many companies’ ability to undertake effective compliance monitoring, supervision and oversight, which, in turn, has created opportunities for unethical and criminal behaviour.
Communication at this time is essential. Leaders need to establish and disseminate a strong, ethical tone, and stay in regular contact with staff. Employees need to be reminded of the importance of integrity and ethical behaviour. In the midst of so much uncertainty, it is vital that companies are consistent in their messaging.
All companies should commit to core values, a code of ethics and a strong corporate culture on which they can rely. At times of crisis, those values should come to the forefront of company thinking.
Ultimately, companies must resist the temptation to sacrifice their controls, governance and culture when adjusting to the new realities of COVID-19. It would be easy, certainly in the short term, for companies to relax their standards, particularly to maintain business continuity during this period of disruption.
Companies that overlook the ethics and compliance failings of their leaders or employees now may face a financial and reputational reckoning down the road. Integrity and ethics have the potential to be key differentiators as companies look to rebound and recover.
© Financier Worldwide
BY
Richard Summerfield