By Anna Romberg
Decision makers and leaders are encouraged to assess the effectiveness of their compliance work by how uncomfortable it feels. A compliance program that does not feel uncomfortable is likely only working on paper, with little impact on conduct and culture.
In the wake of corporate scandals, organisations declare a renewed focus towards ethics and compliance. Compliance officers are hired, new policies are drafted and training programs are rolled-out. Companies within the financial sector were likely already working with compliance prior to the scandal, while non-financial companies may not have had formal compliance work in place. The common theme is however that the renewed focus on compliance will change the culture, the bad apples will be rooted out and the board and management will be able to move on. With all the investments in compliance work, expensive investigations, legal advice and technological infrastructure we must question whether the conduct actually is changing? Is the investment in compliance bringing the results that we want to see? Are we seeing less financial crime and less bribery? Is the compliance work part of the solution or in fact part of the problem?
The risk for counterproductive compliance programs
In my research I argue compliance work risk becoming part of the problem if the more informal aspects of the work are neglected. The challenge with compliance is to measure the true output from the work. We can measure the activities undertaken, such as persons trained, conducted due diligence reports, red flags analysed and suspected activity reports filed. But how do we measure the true impact? How do we measure that behaviors are changed, decisions are more sustainable and misconduct and criminal acts are reduced? Are the penalties and fines paid by companies resulting in more sustainable business practices, or are they a mere formality for companies to move on while the underlying conduct to a large extent is remaining unchanged?
Based on my research, personal experience and interaction with the compliance community across the globe, the success of the ethics and compliance work seem to be highly person dependent. To assess the effectiveness of the work we should ask a few questions; is the compliance work focused on fulfilling the letter of the law? Are the main stakeholder for the work regulators and enforcement agencies? Is there a maturity to discuss ethical dilemmas and take wider stakeholder impact and longer term considerations into account, or do we focus on the immediate returns and financial impact?
Embracing the difficult discussions
In my research I explore how a Nordic telecommunications company is implementing a new system for ethics and compliance in the response to allegations of corporate misconduct. The work is highly regarded by regulatory bodies and external stakeholders, while the ethics and compliance team internally is struggling and feeling that they are on a battlefield. The renewed business practices are highly person dependent, and changed corporate conduct is reliant on whether the ethics and compliance officers persists on the ethical battlefield. In the midst of the implementation efforts the team question the effectiveness of their work as the “pushback” is tangible. A realization that ethical struggles and frictions are a sign of success and that the conduct actually is changing becomes a turning point. The challenge is however that this success is dependent on that the ethics and compliance officers prevail the ethical struggles and do not succumb to the pressure to compromise. The work is having an impact, but is but highly person dependent.
In the recent money laundering scandals, involving Nordic banks, we see that there were obvious red flags, critical risks and internal audit reports that were ignored. The formal governance was in place, however the informal parts such as responsible leadership and courage to really understand these signs were lacking. Too often there is a reliance on that “these are just red flags” and even if it walks like a duck, quacks like a duck and sounds like a duck, key decision makers refuses to see the duck. In this context, the compliance work is dependent on the person who dares to raise the obvious question “how can we say that this is not a duck?”
The solution lies with responsible leaders
In addition, to more investments in compliance and involvement of an army of lawyers and advisors, corporate scandals tend to give rise to renewed regulation. New regulatory agencies are formed and stringent reporting requirements and formal procedures are required. The ultimate cost for this is taken by the end customer, the consumer and the tax payers. Regulation is a vital part of good governance and responsible corporate conduct, but is not the solution. The solution lies with courageous leaders, whistleblowers and those that challenges the status quo. In the rise of new regulation, we must remember the purpose for the regulation and ensure that we find ways to measure progress in light of the ultimate purpose.
Formal compliance work is an important mean for creating a responsible and ethical culture. Formal compliance work will give rise to information, expose dilemmas and challenge decision makers. The impact from the work is however dependent on the conduct that follows. More often than not companies are relying on legal opinions, while leaders refrain from having their own opinion. Conduct that may seem legally acceptable, may become ethically questionable over time. Culture is not formed in a vacuum, but a consequence from conduct. Tone from the top is not what the management is saying, but what they are doing, what kind of behavior is rewarded and which type of leaders are promoted. Struggles and frictions are a normal part of ethical business and a sound business culture.
Figure 1. Ethical struggles and dilemmas are a vital part of formal compliance work.
Measuring success by discomfort
To ensure that compliance does not become part of the problem, providing a false sense of comfort and being a wasted investment, we must ensure it is not person dependent and that discomfort is not seen as a sign of failure. Managing ethical struggles is not for one individual or team, but a task for all employees and ultimately the management and the board. One way of measuring the success for the ethics and compliance work is in fact to evaluate how uncomfortable it feels. Business ethics will always feel uncomfortable as we are changing behaviors and moving towards more sustainable and transparent business practices. A compliance program that does not feel uncomfortable is likely only working on paper, with little impact on conduct and culture.
About the Author
Anna Romberg is a PhD, executive and lifelong learner. She is an advocate for good governance and has a specific interest in the human aspect of ethics and compliance programs. She is the co-founder of the Nordic Business Ethics initiative, an appreciated speaker and has co-authored the book The Grey Zone – a practical guide to corporate conduct, compliance and business ethics.
Anna is a member of the executive management team at a global medical technology company, heading the Legal, Compliance and Governance function.
