Jim Nortz (jimnortz@axiomces.com) is Founder and President of Axiom Compliance and Ethics Solutions LLC in Rochester, New York, USA.
The publication of Chapter 8 of the US Federal Sentencing Guidelines (FSG) in 1991 launched the compliance and ethics profession that we are now a part of. As the 30th anniversary of this milestone approaches, I thought it appropriate to reflect on the effect we compliance and ethics professionals have had on the ethical performance of the corporations we serve.
Progress to be made
Like you, I have labored in the corporate “vineyards” for many years with the hope that my efforts would materially reduce enterprise legal and ethical risks by preventing and detecting misconduct and promoting a strong ethical culture. There is evidence that our efforts have not been in vain. The business ethics survey data from the Ethics and Compliance Initiative (ECI) consistently show that firms that have implemented the FSG’s seven elements of an effective compliance and ethics program have lower observed misconduct rates. They also show that there is a tight correlation between observed misconduct rates and the strength of a company’s ethical culture—the stronger the culture, the lower the observed misconduct rates. However, their 2018 Global Business Ethics Survey (GBES) report included the following observation that concerns me greatly and presents a significant challenge to all compliance and ethics professionals: “Little progress has been made across the country to implement the most important strategy for mitigating wrongdoing. Misconduct drops substantially when organizations have strong cultures in place, yet the number of organizations with strong cultures has not changed” (emphasis added).[1]
You might discount the GBES data as being skewed, because it includes responses from employees of randomly selected companies that may not have formal compliance and ethics programs. But before you reach that conclusion, consider that Johnson & Johnson, Merck, Pfizer, JPMorgan Chase, Goldman Sachs, Wells Fargo, and hundreds of other marque companies with stellar compliance and ethics programs have been caught engaging in systemic corporate corruption resulting in hundreds of billions in fines, multiyear settlement agreements with state and federal prosecutors, incalculable opportunity costs, and thousands of shattered careers.
Consider also criminal and civil enforcement data reported by the U.S. Department of Justice (DOJ). Monetary recoveries related to corporate non-prosecution agreements and deferred prosecution agreements have trended upward over the last 18 years, totaling a near record $8.1 billion last year. There is also a disappointing trend with respect to corporate fraud prosecutions. In 2018, DOJ recovered $2.9 billion—on par with record amounts collected in past years. Moreover, the data show no reduction in the annual number of False Claims Act actions for the last 31 years. Nor is there evidence of reductions in Foreign Corrupt Practices Act (FCPA) and FCPA-related enforcement actions that continued at a near record clip last year.
A sober analysis of these data lead to one conclusion: We may be winning some battles, but we are losing the war. Despite our best efforts, systemic corporate corruption involving thousands of employees—including top management—continues with discouraging frequency. Adding another inch or two of policies to the pile or beefing up compliance training programs are not likely to change these trends or materially reduce the risk that your firm will be the next successful target of a compliance enforcement action. Instead, our best hope of achieving this end is to take the bold steps necessary to lead an “integrity revolution.”
Leading the revolution
The objective of the integrity revolution I propose we lead is to materially increase our firms’ capacity to:
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Effectively manage its inherent legal and ethical risks;
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Withstand the pressure to compromise ethical standards to achieve performance goals; and
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Hue to fundamental moral values, such as respect, responsibility, honesty, fairness, and compassion.
Just as W. Edwards Deming, the father of the “quality revolution,” proclaimed that process quality is the key to improving all aspects of business performance, I proclaim that improved corporate integrity can eradicate systemic corporate corruption and optimize a firm’s capacity for sustained financial performance.
To lead this integrity revolution, we must focus our efforts on our directors. As the top governing authority, boards of directors are the only entities with both the power and the legal mandate to set performance standards for senior management and hold them accountable for building and sustaining a strong ethical culture. The fact that there has been no improvement in the strength of corporate cultures over the last several decades is directly attributable to the fact that most boards are not getting this done. This reality was acknowledged in a 2017 National Association of Corporate Directors Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset that observed: “[I]n many organizations, culture does not get the level of boardroom attention it deserves until a problem arises.”[2]
As a profession, we have seen this lack of board engagement firsthand. In 2018, LRN Corporation published a report entitled
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Most CECOs feel that boards do not fully understand the ethics and compliance programs they are supposed to be overseeing.
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CECOs say boards need a more systematic approach or game plan for the oversight of ethics and compliance.
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CECOs believe many boards do not devote significant time and priority to ethics and compliance.
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Most CECOs believe that boards do not go into sufficient depth on ethics and compliance programs and outcomes.
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Most CECOs believe that their boards do not focus on the root causes of behavior or appreciate the competitive advantage company culture can provide.
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Most CECOs believe that their boards lack appropriate metrics through which to evaluate ethics and compliance.
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Most CECOs believe that boards do not ask enough of executive management in ensuring effective ethics and compliance.
If these observations describe the way your board of directors operates, you are not alone. But unless you are blessed with an enlightened senior management team that is already fully engaged in driving ethical excellence, your efforts to build and sustain a strong ethical culture can be fairly characterized as “mission impossible.”
‘Recruiting’ the board
Your capacity to make headway with the board in your company will depend on your position, the social dynamics of your executive leadership team, the board members, and other factors unique to your company. Consequently, the specific tactics taken to lead an integrity revolution will vary substantially from firm to firm. However, one of your primary objectives must be to make the business case for placing integrity metrics at the top of every board agenda and to hold the CEO accountable for meeting defined performance targets.
Directors are bombarded by a blizzard of performance data they need to consider in performing their duties. But business performance metrics are not created equal. Employee engagement and productivity, product quality, safety, investor confidence, customer satisfaction, and every other conceivable business performance metric all depend upon firm integrity. Therefore, key integrity metrics need to be the first item on every board agenda and presented by the CEO to the full board rather than by the CECO in a 10-minute report at the end of an audit committee meeting. Although compliance and ethics professionals can help, integrity optimization cannot be outsourced. The board and executive management team must own it.
Details about specific methodologies for gathering and presenting integrity metrics are beyond the scope of this short essay. But such methodologies do exist, and there is ample data showing a tight correlation between organizational integrity, as I’ve defined it, and sustained financial performance.
In his classic book Out of the Crisis,[4] Deming recounts his many years of struggle to develop quality optimization methodologies and persuade corporate management to adopt them. Those of us who choose to lead an integrity revolution can anticipate a similar struggle. However, when we are successful, we will not only eliminate the risk of costly systemic corporate corruption in our firms, we will also materially optimize our firms’ capacity for sustained financial performance.
Takeaways
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Compliance and ethics professionals have succeeded in reducing observed misconduct rates by implementing the Federal Sentencing Guidelines’ seven elements of an effective compliance and ethics program, but systemic corporate corruption rates have remained the same.
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To eradicate systemic corporate corruption, we must lead an “integrity revolution” akin to the “quality revolution” that vastly improved productivity, waste reduction, and customer satisfaction.
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We must focus efforts on our boards of directors. Only they have the authority and power to compel ethical excellence and drive strong ethical cultures.
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We must help directors recognize the primacy of integrity performance metrics and hold the CEO accountable for meeting defined performance targets.
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Integrity cannot be outsourced to the compliance and ethics department. The board and executive management team must own it.
