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Profit vs compliance

07 June 2016

Profit vs compliance - read more

A new study shows that businesses are failing to prioritise compliance

It is called the bottom line for a reason – share price, profits and turnover are the fundamentals for any emerging or established business. However, the appetite for growth can push compliance priorities down a corporate’s agenda.

Where commercial priorities push anti-bribery and corruption compliance to the wayside, employees and their managers are usually suffering from ‘ethical blindness’ – a concept coined by Professor Guido Palazzo.

Palazzo theorises that good people regularly make bad decisions and display unethical behaviour without being aware of it; the blindness being caused by an endemic culture within the business to put profit and economic success above everything else.

This is supported by our recent study into corruption compliance. The report is the culmination of discussions with 604 of the world’s largest multinational companies via their chief compliance officer or equivalent. Each company has a minimum of 2,000 employees with at least $350 million in turnover. The results show that far too many companies are failing to prioritise compliance.

These corporates and the individuals running them may be ethically blind to the decisions they are making and lack the policies to embed a strong compliance culture. Even if such compliance policies and procedures exist, they can often be just for show and not fully implemented.

Compliance efforts must be sensitive and proportionate to the risks faced by the business. Corruption compliance merits serious attention as there is now a greater drive for transparency from regulators and accountability from shareholders and the public.

Ultimately, neglecting compliance can lead to serious questions about the financial future of the company.

Tone at the top and the middle

The leaders of an organisation set its moral compass. CEOs, CFOs and COOs must demonstrate a commitment to compliance strategies in order to generate a strong organisational pressure that filters down to middle management, as it is their attitude that directs employees on the ground.

Social studies have shown that people are reluctant to act unethically if exposed to clear direction, and this is self-sustaining. If the majority of the organisation adopts an ethical position, individuals are more likely to mirror the opinion of the majority.

However, our research suggests that only 60% of CEOs regard corruption compliance as a key priority – in 44% of companies it is not even a standing item on the board agenda – and even if organisations employ Chief Compliance Officers (CCOs), only 39% of them report directly to the CEO.

A company that neglects compliance at board level will find it virtually impossible to impose a culture of compliance among its employees. In our study one respondent said: ‘the CEO is too busy to respond to compliance, so people do not fully report on compliance issues.’

Reporting lines to the CEO should be ‘uninterrupted’ so the board and the company can make informed decisions about compliance. At present 58% of CCOs state their advice to the CEO is filtered.

By no means does the CEO need to handle all decisions or does the CCO need to be satisfied in handing-off risky issues. However, as seen with the recent emissions scandal, a lack of information or, conversely, a deluge of it, suggests businesses should make information about corruption risk a priority and have systems or individuals in place at a senior level to efficiently handle these issues.  

The emergence of a negative culture

The apex of a company’s hierarchy dictates the culture of a business. Being aware of corrupt practices is one thing, but companies must ensure they do not slip into negative practices.

43% of our respondent CEOs stated they were not prepared to walk away from a contract with high bribery and corruption risk, which suggests that short-term priorities are of a higher importance. This is supported by 59% of CCOs expressing the view that they fear losing their jobs if they miss a target. But how does this self-repeating practice start?

Professor Palazzo posits that it emerges from ‘the temporary inability of a decision maker to see the ethical dimension of a decision’. It starts with a sense that how an individual is acting is wrong but with situational, personal and organisational pressures and with the lapse of time, the tension dissipates and the ethical concerns fade away. The individual views their subsequent decisions through a narrow, specific frame that makes them blind to a problem.

Unethical business practices can increase incrementally and become normalised. Without strong organisational pressures – from the top down or by a strong compliance culture – to prevent these decisions from being perpetuated, ethical blindness can be amplified.

An Enron executive once declared: ‘you did it once, it smelled bad… you did it again, it didn’t smell as bad’. A culture of unethical or illegal decision making can persist and an organisational structure that is personified by those individuals at the top of the corporate structure will likely tolerate this behaviour. Thus, these practices cascade down to employees.

The senior management of the organisation needs to balance profit targets with managing compliance. Unrealistic targets; individualised incentives, often for key personnel at the top of the company; aggressive competition; and personal pressures create a culture of fear that disengages the individual from ethical dimensions of a decision.

Social or moral capital is downgraded at the expense of furthering a company’s financial goals. This perspective has been reinforced by our research: 53% of CCOs say that the resistance they encounter from the rest of the business is due to people feeling that compliance conflicts with what they are expected to achieve.

Policies, implementation and localism

Corporates may lack programs that tackle bribery and corruption risk. Even if policies are established, organisations often produce lengthy documents rife with technical detail that are difficult to interpret, hard to refer back to and result in individuals judging the risk level based on their own judgment.

CCOs in our study confirmed this, and two-thirds of respondents highlighted that the company is better at developing guidelines than enforcing them.

Organisations need to be more succinct in their policies and establish easy mechanisms for employees to report concerns. However, many companies still lack something as basic as a whistleblowing hotline.

Hotlines must be established, easy to access, widely known about and be regularly used – that will be a key indicator to regulators that compliance is a priority and not an afterthought.

Organisations should also consider that a one-size-fits-all approach to their global activities may not be sensitive to local needs. 60% of CCOs say cultural differences contribute to a lack of support for corruption compliance programs.

Our South-East Asia task force highlights that an employee is less likely to use a whistleblowing hotline in Vietnam or Thailand, especially if the person at the other end of the phone is a non-native speaker based in a different country.

Bribery too can be more common in relationship-based cultures, such as in the Far East, as accelerating bonds of trust between people can facilitate business. A hegemonic Western discourse on how to prevent bribery and corruption may not always easily translate across different regions. Nevertheless the basic message must never be lost.

The quest for profits at the expense of compliance can be costly. Bribery and corruption risk is a serious threat to the future of businesses and compliance efforts must become an active part of a company’s DNA.

As Professor Palazzo says, ‘believing that we can change our behaviour later might actually keep us from changing it now.’ If a culture exists where unethical behaviour is tolerated, it has the potential to permeate and rot the organisation leading to its downfall. Compliance is no afterthought.

Read Hogan Lovells' Eight steps to good compliance culture
 
The study ‘Steering the Course: Navigating bribery and corruption risk’ was published in April 2016 and can be found at www.hoganlovellsabc.com

Liam Naidoo is a Counsel and Khushaal Ved is a Trainee at Hogan Lovells

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