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New research shows that more than half of large companies spend fewer than two hours on E&C every year, exposing themselves to reputational risk and loss of value. David Greenberg and Emily Miner of global consultancy LRN advise on how to bring E&C to the centre of decision-making
When highly publicized ethical failures blow up major companies, one of the first and most relevant questions is, “Where was the board?” For example, the Weinstein Company’s board failed to act against their founder’s sexual abuse until they absolutely had to, and the company ultimately declared bankruptcy after immense public backlash.
The Weinstein board is hardly an anomaly. Though boards of directors are required by law to oversee company compliance with law and regulation, ethics and compliance (E&C), this function, which is designed to help companies meet their ethical and legal responsibilities, is too often neglected at major companies.
This failure can have huge consequences, since the ethics and compliance function is tied directly to the board’s central concerns: value and reputation.
Only 40% of CECOs say that their boards of directors are willing to hold senior executives accountable for misconduct
Bringing to life the dynamics of actual board involvement with E&C, we at LRN interviewed 26 present and past chief ethics and compliance officers (CECOs) of large global companies and found that:
• Only 40% of CECOs say that their boards of directors are willing to hold senior executives accountable for misconduct.
• Nearly half say that their board has not received education and training on their E&C responsibilities.
• Over 50% say their boards spend two hours or fewer working on E&C each year.
• About 40% say their boards have not done a “deep dive” on compliance failures and scandals, despite recent US Department of Justice regulations requiring them to do so.
However, smart boards take a hands-on approach to the compliance function, and savvy, forward-thinking business and compliance leaders seek to move E&C away from the periphery of a company toward the centre of operations. In other words, effective leaders create business operations and company cultures in which E&C is “built in” rather than “tacked on”.
So how can boards and senior leaders, including CECOs, enable E&C to be seen as a crucial and indispensable function of business? A lot rests on whether all key leaders properly communicate the importance of E&C – by what they do and not just what they say – and whether a company’s values and culture are expressed through their E&C programme.
CECOs and generals general counsel need to up their game and push their boards to devote more time and priority to ethics and compliance. To do this, they need to engage their boards in a strategic discussion of how ethics and compliance can drive valuation as well as protect reputation – and how employee behaviour and decision-making are central to those objectives. They must show their boards that, by translating their company’s mission and values into specific, measurable behaviours, the E&C function provides guidance to employees on doing the right thing. And compliance leaders must provide their boards with hard metrics around company culture and behavior by quantifying the extent to which E&C practices and policies influence the right behavior and deter the wrong behavior.
Boards tend to devote too little priority to the deeper questions of E&C, with a bias toward a 'check-the-box' approach
A lot rests on boards, too. Boards must elevate CECOs by treating them as essential members of senior leadership. This means taking some concrete and significant steps: looking to CECOs for input on key business decisions and for strategy on influencing employee behavior in the right direction, providing direct and frequent access to committee chairs and board members, and giving them the space to challenge management when necessary, without any fear of retaliation.
Boards tend to devote too little time, priority and depth to the deeper, more fundamental questions of E&C, with a bias toward a “check-the-box” approach: How many people have been trained? How many calls have been made to the compliance hotline? How many acts of misconduct have been recorded this year? Do we have the right rules in place?
But if E&C leaders can shift ethics and compliance away from a granular focus on rules, toward being driven and defined by a company’s character – its core mission, beliefs, and ethics – then they stand a much better shot at minimizing misconduct and encouraging the right behaviours. While an employee can’t memorize every rule in a code of conduct, and compliance experts can’t be available around the clock, a deeply ingrained value can serve as a guiding principle for a wide variety of scenarios. And this values-based approach is backed up by other LRN research: 89% of the highest performing E&C programmes communicate organizational values as well as rules.
Ultimately, the gulf between CECOs and boards can be bridged, but it requires boards, senior management and CECOs to unite in taking meaningful steps to acknowledge the very real financial, tactical, and moral benefits of the E&C function. Ethics and compliance needs more support and scrutiny from boards if it is to safeguard company reputation and performance.
David Greenberg is special adviser at global consultancy LRN, which works with organizations in more than 100 countries and has offices in New York, London, and Mumbai. www.lrn.com Emily Miner is member of the E&C advisory team at LRN.