“We didn’t know.” “We missed it.” “It was a rogue employee.” There is not an excuse I have not heard for ethical failure. But when I investigate a company after allegations of fraud, corruption or workplace wrongdoing, almost always there is a complacent, captured or entrenched board that did not take corrective action. In a few cases, boards actually encouraged the wrongdoing.
The first myth is that the board is a “good” board. There is no relationship between the “glow” or profile of directors and whether the board is “good.” Often times, there is an inverse relationship, as trophy or legacy directors typically lack industry and risk expertise in recognizing fraud or understanding what proper compliance looks like, are not really independent, are coasting and not prepared to put in the work, or they themselves may not possess integrity.
How important is integrity? Extremely. Three factors make for a good director or manager: competence, commitment and integrity, with integrity ranking first. Otherwise, you have the first two working against you.
Integrity needs to be defined, recruited for, and enforced. “Does your colleague possess integrity?” “Yes” is an answer to this perfunctory question. Full marks. But when I define integrity to include avoiding conflicts of interest, consistency between what is said and done, ethical conduct, and trustworthiness – and guarantee anonymity, I get a spread of performance scores. Those who do not possess integrity in the eyes of their colleagues are poison and should are extracted from any board or a senior management team. They never should have been elected or hired in the first place, which is a recruitment failure.
Fraud, toxic workplaces, bullying, harassment and pressure do not occur in a vacuum. Many people in the company know. The issue will not go away, will only get worse, and is a latent legal, financial and reputation risk.
For bad news to rise, boards need to ensure that protected channels exist and are used – including for a director or executive to speak up in confidence, and for an independent consequential investigation to occur.
Ethical reporting also needs to assure anonymity to the fullest possible extent to receive reliable information. If a whistle-blowing program has any manager as the point of contact, it is not effective. Whistle blowing, culture surveys, and ethics audits should be conducted independently and reported directly to the board without management interference.
Frequently, I find ethical design and implementation failure are the culprits, with codes of conduct, conflict of interest policies, whistle-blowing procedures, culture and workplace audits, and education and communication being perfunctory at best, overridden by management at worst, and not taken seriously by employees or key suppliers, with minimal assurance and oversight by the board.
Complacent boards and executives are the last to know and deny any wrongdoing, having creating the conditions for fraud to flourish. Shockingly, lacking any pride, in full denial, and further reinforcing their entitled self-serving mindset, they refuse to resign.
After ethical failure happens, executives argue that it is a lone rogue employee or an isolated incident. Nothing could be further from the truth. It is an employee who reflects the true and actual culture, internal control environment, and practices of the organization, and who is attracted to and flourishes within them. There is no such thing as a rogue employee. It is a board that approved the conditions that management proposed within which employees operate. The board’s leverage of approval, documentation and questions went unused and unasserted. They are the very people who should not be overseeing subsequent reforms, as they are assessing their own shoddy work.
This lax control environment, where self-interest is pursued and where pressure is applied, is the heart of ethical failure.
There is a shocking lack of internal controls over employee and agent behavior that I have found in corrupt jurisdictions in which Western firms do business. This means, not only is the potential for fraud rampant, but also that costs of compliance are being borne by companies who do not bribe and have proper controls. They are penalized for doing things right.
Furthermore, there are corrupt jurisdictions whose companies and government officials offer and receive bribes and advantage themselves over Western counterparts, including in Russia, China, India and MENA. The most recent example is bribery allegations at FIFA. This unequal playing field puts Western companies – in the US, UK, Canada and elsewhere – at a disadvantage, when competing for business, opportunities and contracts.
This is why Western governments are seeking to put their countries and companies in the most competitive position possible. They are enforcing anti-corruption laws using long arms of justice to prosecute bribery. They are also debarring companies from government contracts who commit ethical breaches. This debarment is a powerful motivator to spur investment to internalize the costs of internal controls over integrity.
Western industry will mistakenly argue that integrity laws will disadvantage them or cost their industry jobs, but the reality is the opposite. Tough integrity laws will prevent substandard competitors from offering bribes, will disincent recipients from receiving bribes, and will strengthen Western companies who compete on the basis of price, quality and service.