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#Governance, Risk and Compliance

A tale of two cultures: Ethics and Compliance

International Compliance Association

compliance , compliance culture , ethics , regulators , regulatory body

Am I alone in being fed up with hearing the words `culture`, `tone at the top` after each headline associated with a new banking or corporate scandal? Have corporate environments really lost their moral compass?

The fact that many of these scandals have occurred within highly regulated industries with allegedly strong compliance programs, only highlights the lack of understanding what culture really means and how and why it can directly influence behaviour and decision making. Recent compliance failures beg the question whether companies can be trusted to govern themselves anymore. Most are certainly ´´doing compliance´´ but are they getting the culture right?

Knowing the rules does not mean people will necessarily follow them. Having a ´compliance culture´ is not the quintessential element. An ethical compliance culture which represents and embodies the values of the regulatory framework and its objectives is.

Within the corporate governance environment, compliance means obeying the law. Ethics is the intent to observe the spirit of the law, in other words, it is the express intent to do the right thing: protecting our customers, behaving respectably in the markets and preserving public confidence, and exhibiting a cooperative attitude which enables financial crime to be fought efficiently.

Despite a significant level of investment in compliance by companies, the frequency of major compliance failures and transgressions continue to grow. We have seen many recent examples where corporate troubles have ensued from a culture of setting behavioural standards at a purely compliance level with the rules: The `as long as it is legal` approach.

Legitimate questions are now being asked on whether we need to rethink our attitude and approaches to managing compliance risks by encouraging our people to go beyond compliance and ´do the right thing.´ According to the Siemens anti-corruption cop: ‘Healthy compliance cultures depend on a more values-based leadership, where people don’t need to look at the rule book, where they know intuitively what the right thing to do is.'

Cultivating a high degree of integrity is an essential human component of an organizations compliance program. There is much debate in the field as to whether a rules or value based approach should be taken in order to build, maintain and support a culture of ethics. The excellent Michael Josepshon provides a succinct appraisal of the two approaches:

According to Michael, a purely `compliance culture` tends to be rules-based, with the rule itself dictating decision making. This he contends, invites a ``legalistic orientation`` where focus is on meeting technical requirements of regulation, rules, policy and codes. Arguably, he considers this approach ``minimalist`` with compliance perceived as a mechanical process, a box to be ticked rather than catering to individual decision making and behaviour. The danger with this, he states, is that people will do just what is required and at times creatively “bend” the rules to make dubious but reasonable interpretations to justify conduct as being relevant to operational efficiency or financial performance.

Compliance to the letter of the law is the objective here. Ethical consequences are not considered beyond the compliance context: It is sufficient that employees know and follow the rules. This can feed into the quality of compliance training and the way it is conducted. Too much emphasis on rules and codes may disengage employees and render training routine, mundane and... dare I say, plain boring.

In contrast, Michael considers an ´ethical culture´ as values based, dominated by core ethical beliefs. Here knowing what is ``right and good`` underlie each rule and policy. Thus, rules and policies are put into place according to traditional ethical values such as integrity, respect, equality and responsibility and `while employees are expected to know and follow rules and policies they are also expected to make a good faith effort to uphold the spirit (purpose) of the rules.` There is expectation that staff will understand that just because conduct is permissible under the law, this does not necessarily mean that it is just and equitable. According to Michael, an employee is `expected to understand that ethics sometimes requires knowing the difference between when there is a right to do something and what is right to do.`

The point here that we all can agree upon is this: Compliance is an essential part of what we do. How we get there is essential to that objective, because unless we approach the goal with a high degree of ethics, compliance becomes insincere. Most business leaders (See recent comments by the new Barclays chief) are now beginning to recognize that mitigating risk is not the only benefit of having a culture strategy. Research published in 2012 by the Centre of Ethical and Legal Compliance confirms companies with higher ethical standards perform better. They are more productive, have better brand equity, increased shareholder value and customer retention and loyalty.

A comprehensive value based initiative needs to start with a few key points:

The key to cultivating ethical standards within your compliance program is intrinsically and fundamentally linked to the culture that is nurtured and promoted within the organization. Setting value based standards can be achieved by having a value based code of conduct and consistent internal communications of its existence. However, the most important component for cultural change is leadership. This goes beyond the `tone at the top` or ´significant influencers´ facet.

People naturally emulate their immediate managers and too often the behaviour of middle and lower management is ignored. Large or complex organisations have many sets of sub-cultures and many unwritten rules. If immediate `supervisors` are not committed to values and ethics, this becomes immediately apparent to lower level employees. An organization's ´tone at the top´ must be translated into a ´tone in the middle´ before it can reach the bottom of the organization.

Such an approach requires senior executives to clearly articulate the values that are vital to the organization and these should be communicated frequently, with intensity and commitment. Value statements are a start, but culture change requires more than a piece of paper. Senior executives need to translate values statements into clear and specific behavioural standards that reflect how business should be conducted. To have employees engage in ethical behaviour, organizations must go beyond talking about rules. Focus should be on scenarios that play out in the dynamics of the work environment – specifically, how people react and conduct themselves when faced with decisions that rely on the organization’s values. Attention to other ``surface`` conduct that prevent ethical issues from emerging such as ignoring or covering up problems should also be addressed with the protection of those employees who brings forward problems emphasised.

Going beyond a culture of compliance and its associated policies and procedures, creating an ethical culture necessitates a long-term and sustained effort. Convincing cultural change revolves around the themes of accountability and responsibility with ethical metrics integrated into performance, promotion and compensation plans. As with any control framework, the cultural pulse also needs to be continually evaluated and monitored to ensure success.

A value based approach to compliance should help the organization form the foundations of an ethical culture that serves as a standard of `this is how we do business here. `


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