Why Compliance Programs Work Like Pushing a Rope

Few ingredients are as important to building a successful organization as culture and most CEOs will argue that integrity is one of the cornerstones. But how do CEOs foster an entrepreneurial spirit and ambitious drive to perform without compromising ethical standards? With the consistent stream of ethical scandals in the financial sector and beyond, answering this question has become one of today's key leadership challenges.

Here is what we see. The CEO refers to business integrity in speeches and company-wide communications; employees are trained on the Code of Conduct and certify their commitment annually; well-staffed compliance and audit functions manage a hotline and monitor violations; and employees who breach ethical standards are sanctioned.

Doesn’t this sound like a pretty good effort to encourage ethical conduct? Strong tone from the top, clear expectations and widespread awareness, combined with checks and balances. Perhaps it is similar to what you have in place in your organization?

If so, you should be worried. The elements above had been in place in the organizations that experienced severe ethical breakdowns leading to reputational disasters, billion-dollar fines, jail sentences and outright collapses.

Despite the many well-intended efforts to ensure ethical conduct, much of it works like pushing a rope. In fact, most ethics & compliance programs are bureaucratic, expensive and toothless as about 99% of resources are spent on policies no one read, compliance training employees click through without looking, and monitoring that address individual transgressions, while less than 1% focus on managing the factors that drive behavior in performance-driven organizations: what leaders say and do, and what gets rewarded.

Are today’s ethical lapses really caused by ‘bad apples’? Surely, people of right character would always do what is ethical, no matter the circumstances? Such a narrow perspective, however, fails to recognize how much people are influenced by the organizational context in which they do business. While some large organizations may have a few outright crooks, even good people will do what they know is wrong, if the context does not specifically encourage, or even discourages, responsible behavior. Think of physicians incentivized to perform a certain number of specific surgeries to achieve targets and get their bonus, or bank staff working under pressure to grant a certain number of mortgages every day, or risk being sanctioned.

So why do CEOs invest time and effort into such traditional compliance programs if these are costly, drain employee engagement and have little impact? They do because they have to. The U.S. Federal Sentencing Guidelines and the UK Bribery Act, amongst others, require companies to establish “an effective ethics & compliance program” and “adequate procedures,” in order to protect themselves from severe penalties or possible exclusion from government business. Sadly, such regulatory requirements hinge on the “bad apples” theory, and therefore prescribes tick-the-box activities with no real impact on behavior.

Brushing regulatory arguments aside, however, there are several reasons why leaders should indeed strive to manage organizations responsibly, albeit in an entirely different way: one that motivates employees, explores opportunities from increasing ethical expectations in today’s society, and achieves sustainable performance. While the potential benefits are great, CEOs cannot view it as a nice-to-have hobbyhorse to be addressed when everything else is done, or a risk management exercise to be handed over to the General Counsel or Chief Compliance Officer with no further ado.

Rather, it requires leaders to do two things 1) view business through holistic lenses to meet not only commercial, but also legal and ethical responsibilities simultaneously, and 2) create the right context that enable others to do the same — through the guidance that leaders provide, the organizational climate they establish and behaviors they reward.

The latter means introducing a two-dimensional incentive system that measures and rewards the achievement of business objectives against adherence to ethical standards, with equal weight and direct impact on compensation and career prospects. Moreover, performance incentives should combine financial and non-financial incentives, which have been shown to be more effective motivators for performance.

Some leaders argue that rewarding ethical conduct is absurd; why reward something that is simply expected? Company values placed on the wall at corporate headquarters already define how to behave and a code of conduct sets limits. In any case, integrity is too subjective and impossible to measure. So it goes. Well, performance-driven organizations indeed already do reward what is expected; leaders are rewarded for leading, researchers for researching and sales people for selling. In the end, an organization rewards what it believes is important. Therefore, if it strives to conduct business responsibly, it must reward it.


Cornerstone Journal of Sustainable Finance & BankingSM / May 2014 / 50

Dan Ostergaard is CEO of the PolicyStore, Basel, Switzerland. Previously he was Chairman of ENICO and headed the global integrity function at Novartis.

Dr. Michael Fuerst holds a Senior Manager position at Novartis. He has more than 14 years of experience in integrity, compliance, corporate responsibility and shared value strategies in both business and academia.


Are Your Leaders Equipped for Changing Business Climate?

Are Your Leaders Equipped for Changing Business Climate?

What made leaders successful in the past will not do in a vastly changing society: large generational differences between workers; vast technological advancements; high ethical expectations; unparalleled transparency; shift in economic gravity towards east and south; as well as strong regulation and enforcement. These new realities represent a conundrum for leaders: how to ensure ambitious yet responsible decision-making?

Do your leaders walk the talk?

How do you assess whether leaders will drive sustainable performance or build a house of cards that will eventually collapse?

Answering this question has become critical with ethical breakdowns causing billion-dollar fines, reputational disasters and a financial crisis. Well, it really comes down to whether leaders ‘walk the talk’, i.e. take responsible decisions and create conditions for others to do the same. But what does it mean and how do you measure it?

Just ask employees. With the Responsible Leadership Matrix below, employees can - within seconds - reveal whether or not your leaders promote and act with integrity. You can easily to map out your leaders to make sure only the right ones stay and performance lasts.

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The Window Dresser talks about integrity in speeches, newsletters and other communications, but does not back up words with actions. He or she fails to realize that daily remarks and decisions have much stronger impact on employee behavior than majestic statements on ethics. This “do as I say, not as I do” attitude leads to cynicism, destroys trust and saps employee motivation. Companies should terminate its window dressers if they do not immediately take responsible decisions that reflect both economic and ethical perspectives.

The City Snake leads people as ‘general on a horseback’ with an autocratic, controlling style that went out of fashion along with the black and white television. Although city snakes do not promote or act with integrity, companies still employ them for their undeniable drive for (short term) results. With the characteristic “whatever it takes” management style, they lead using fear, shrug at ethical shortcuts, use company resources as their own and promote managers who push the envelope. The City Snake rewards those who make the numbers, whatever the means and should be terminated before destroying companies.

The Lone Rider acts with integrity but does not promote it. Such failure to lead is insufficient in today’s performance-driven business climate. He or she assumes that good people will act responsibly no matter the circumstances, even when faced with business pressure and bonus seductions. The Lone rider fails to embed integrity into performance management processes for hiring, promoting, developing and rewarding people. Companies should equip Lone riders with the required skills to lead others responsibly through establishing clear behavioural expectations, encouraging challenge and introducing balanced performance incentives.

The Responsible Leader champions integrity through words and deeds. He or she invites challenge and embeds ethical behavior into key management processes. As a consequence, the performance appraisal system not only ensures clear expectations for what is to be accomplished, but also for how so ends do not justify the means. The responsible leader sacrifices business deals, which do not meet integrity standards. He or she recognises responsible business as a competitive advantage, which attracts talent, improves motivation and drives innovation by forcing reflection beyond a narrow commercial focus.

How quickly can you map your leaders in the Walk the Talk Matrix? If you are a leader yourself, wear a t-shirt with the matrix on your back and ask employees to pencil you in (and hope that you don't get pain on the left side). 

Why living values must be rewarded

Many argue that companies suffering from ethical breakdowns had failed to effectively communicate their corporate values. However, even communicating values works like nailing jelly to the wall, unless living them is rewarded.

In continuous push for growth, leaders in performance-oriented organisations expect a relentless drive for results. To orchestrate ambitions, they have established sophisticated performance management processes with robust means to define, measure and reward results. However, many of the same organisations have been sloppy in defining, measuring and rewarding how this performance should be achieved, leaving employees pushed to cut corners when faced with pressures or seductions.

Leaders are quick to claim that rewarding adherence to values is absurd; why reward something that is simply expected? Company values prominently placed on the wall at corporate headquarters already define how to behave and the Code of Conduct sets the limits. Moreover, values are too subjective and impossible to measure. So it goes. Well, performance-driven organisations already do reward what is expected: leaders are rewarded for leading, researchers for researching and sales people for selling. In the end, an organisation rewards what it believes is important. Therefore, if it strives to have employees live its values, it must reward it.

The solution to responsible performance is a two-dimensional reward system, which measures the achievement of business objectives against adherence to company values with direct impact on bonus payout and career potential. Objectives must be attainable while living company values as pressures to perform due to unachievable, short-term targets lead production-line workers to look away on quality issues, bankers to sell junk, researchers to fabricate results, and sales people to fix prices with competitors. It is therefore important to define how objectives are to be achieved, to ensure they are not met at all costs in an endless quest to keep a job or reap rewards. As an example, an employee may have an objective to ‘improve profitability’, with a measurable target of, say, 5%. Likewise, the company may define ‘demonstrate ethical conduct’ as a measurable behaviour, derived from its value of integrity.

The performance can thereby be measured on both what and how dimensions. An employee may demonstrate during performance discussions, supported by peer feedback, that he met the profitability objective. Similarly, he argues that he has delivered on the behavioural expectation of the ‘integrity’ value having, say, terminated dealings with a corrupt third party (the measurable behaviour) despite pressures to keep the profitable relationship. Hence, the two-dimensional reward system would rectify a situation where, as an example, a greater 20% profitability could have been achieved through dealings with the corrupt third party (or through Libor or emission manipulation), as it would result in a poor performance rating and loss of bonus. With its transparent focus on both what is achieved and how, the two-dimensional reward system brings business conduct in line with company values.

Leaders in companies ask themselves why some employees cross the line despitevalues being communicated left, right and centre. Well, unless they reward not only what is achieved but also how, companies will continue to make front-page news for the wrong reasons. In today’s cutthroat competitive environment, rewarding howperformance is achieved is not absurd - it is a must for performance-driven organisations striving to be sustainable.

'Compliance Culture' no thanks.

In the wake of continuous ethical breakdowns, lawyers feel mandated to foster a 'compliance culture'. Meanwhile, the risk management function works towards a 'risk management culture', even if colleagues looking after the workplace argue for a 'safety culture'. Business leaders push for an 'innovation culture' and marketeers wish for 'start-up culture'. Well, which one is it? No wonder employees are confused. Why not simply empower and reward people to be creative and responsible while working towards a meaningful purpose. Call it whatever you want.