Fixating on the Inextricable Link: Culture and Misconduct

The Volkov Law Group

The Volkov Law Group

Everyone is now on the culture bandwagon.  For those of us pushing the issue over the last decade, welcome aboard to everyone.  But once you join, the work is only beginning.

Recent converts are embracing “culture assessments” as the new indicator of enlightenment.  That is a terrific development.  But there is more work to do.

To reset the stage, we start with the basic proposition underlying the importance of an ethical culture and commitment to ethical business decision making.  An ethical culture is a company’s most effective internal control – this is just not debatable.

There are plenty of “internal control” geeks who may disagree with my statement.  To those who have spent days (and even years) designing, implementing, measuring and adjusting internal controls, I know you are proud of your work and you should be.  The bottom line, however, is that one, multiple or all of a company’s internal controls may be “effective” but an ethical culture is the most efficient strategy to reduce what every company worries about – employee misconduct.

Companies that suffer high employee misconduct rates inevitable suffer from poor performance.  Such a link is not hard to understand.  Ethical companies have low employee turnover, higher productivity and lower rates of misconduct than non-ethical companies.  (By non-ethical companies, I mean companies that do not emphasize and manage their ethical cultures as a priory).

Employee misconduct can arise in a variety of forms – fraud, sexual harassment, bribery, antitrust violations, HSE violations – and the list goes on and on.  Just use your imagination and employees can develop schemes to benefit themselves at the expense of their colleagues, their companies and their communities. In the end, all stakeholders suffer harm.

By contrast, employees that work at ethical companies are more likely to report misconduct when they observe or hear about it.  This is an important point – if I observe someone stealing from our ethical company, I am likely to report what I observed.  Even more significantly, at an ethical company, an employee is less likely to engage himself or herself in misconduct. 

Given the fact that recent surveys and studies have demonstrated the link between corporate culture and misconduct rates, ethics and compliance officers have a responsibility to address this issue in a meaningful way.  In this respect, culture is not solely measured in basic compliance tasks such as training, signing certifications of compliance, internal investigation rates, and conflicts of interest disclosures.

Corporate culture has to be examined on a continuing basis based on the beliefs and conduct of employees.  Misconduct rates are critical but so is employee surveys – targeted and focused on those parts of the organization where culture issues arise (e.g. product line, geographic office). 

Surveys, focus groups and interviews/conversations are important sources of information.  Surveys can be used regularly to collect information, quantify results, and measure corporate culture on a granular scale.  Focus groups, while not scientific in practice, can provide valuable insights that help to understand a company’s culture.  Targeted interviews/conversations with key executives, managers and employees who are in a position to observe and comment on employee concerns are valuable sources of information.

When all of this is put together, along with other data and information generated from a compliance program, a chief ethics and compliance officer should assume stewardship of this critical aspect of a company’s performance.  Quarterly reports to the Audit or Compliance Committee should address the most significantculture issues – quantitative and qualitative issues should be presented.  If problems are identified, solutions have to be discussed.  A chief ethics and compliance officer has to be held accountable for shepherding a company’s most important intangible asset – its culture.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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