Spotlight on white-collar crime: where is your company most prone to lapses in integrity?

July 21,2019

Every sizable organisation has integrity gaps — areas where what’s considered appropriate behaviour diverges from the norms set by its leaders. Within these pockets, things like...

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Every sizable organisation has integrity gaps — areas where what’s considered appropriate behaviour diverges from the norms set by its leaders. Within these pockets, things like offensive language, overly aggressive sales practices or conflicts of interest may be overlooked or even condoned. Such lapses not only endanger the reputation of the company but also pose regulatory and liability risks.

Many corporate leaders don’t discover the magnitude of integrity gaps until a problem has blown up into a crisis. Compliance and ethics programmes are supposed to prevent such crises, but the people running them are often playing defense rather than strategically rooting out trouble. Fortunately, company leaders can get ahead of the risks by setting up systems for early detection through routine data collection.

Before your organisation can develop a plan to identify integrity gaps in its culture, it needs to accept two things:

Some misconduct occurs at your firm: When I looked at data from a host of internal reporting sources for three innovative Fortune 100 companies — none of which has faced a recent civil or criminal charge — I found that on average, each firm had experienced a violation that could lead to regulatory sanctions (such as a bribe) once every three days. These companies have some of the most robust and effective controls: Even companies that invest heavily in compliance will have some malfeasance within their ranks.

A considerable amount of misconduct is not going to be internally reported: Violations that company leaders learn about are probably only the tip of the iceberg — and that should make leaders nervous. Though some attorneys argue that a company shouldn’t proactively try to identify misconduct because it could turn into discoverable evidence that might be used against the firm, “ignorance is bliss” is not a sustainable way to run a business.

Once you’ve acknowledged that integrity gaps exist in your organisation, how can you figure out where they are? Randomly giving employees a simple survey can help you.

The survey has three questions:

1. In the past quarter have you observed any of the following? Please check all that apply: (a) conflicts of interest, (b) sexual harassment, (c) bribes or inappropriate gifts, (d) accounting irregularities, (f) antitrust violations or (e) theft.

While the kinds of misconduct companies need to ask about will vary with their business models and risks, the question above includes examples of the most pertinent problem areas. Different organisations, and subgroups within them, will get dramatically varying responses to this part of the survey. I have seen some companies where fewer than 0.5 percent of employees report observing certain types of questionable behaviour. But that figure can reach 10 percent or more in individual geographic and functional subgroups in some firms.

When analysing the survey data, look for integrity problems rather than strictly legal violations. For example, a senior manager might regularly say things that wouldn’t legally constitute sexual harassment but that nonetheless make employees deeply uncomfortable.

2. If you observed questionable conduct, did you report it? Please answer yes or no for each of the following: (a) conflicts of interest, (b) sexual harassment, (c) bribes or inappropriate gifts, (d) accounting irregularities, (e) antitrust violations or (f) theft.

Leaders sometimes take false comfort in the fact that they have a code of conduct that requires employees to report any violations they see. In reality, however, that promise is a check-the-box exercise for many employees. The responses to the second question will often illuminate gaps between the code and actual behaviour.

The research firm Gartner has observed that reporting rates vary significantly for different kinds of violations. Workers are most likely to report a theft of company property or accounting irregularities; 46 percent of those who observed a theft reported it, and 41 percent of those who saw fraudulent accounting practices did. However, the reporting rate is considerably lower in other instances, including inappropriate gift giving (27 percent) and conflicts of interest (34 percent).

3. If you noted earlier that you didn’t report the questionable conduct, why not? Please provide a separate answer for each of the following: (a) conflicts of interest, (b) sexual harassment, (c) bribes or inappropriate gifts, (d) accounting irregularities, (e) antitrust violations or (f) theft.

The potential reasons employees don’t report wrongdoing are numerous. They may fear retaliation, be reluctant to get involved, feel conflicted because the incident involved a friend or worry that exposing the misbehaviour could undermine the firm’s goals or financial performance.

Many of the barriers to reporting are institutional problems that require understanding the source of employees’ concern. Others, like not wanting to get involved, indicate that the reporting process itself is — or at least is rumoured to be — too cumbersome. Companies that work to reduce that perception can increase reporting rates.

Critically, data collection should be conducted anonymously to encourage complete candour. Anonymity can be preserved while the firm gathers non-identifying metadata, including the location and rank of employees. That information will reveal to managers which parts of the organisation deserve greater attention. To ensure employee confidentiality, many companies hire a third-party consultant to conduct the surveys and restrict access to their data to in-house compliance, legal and audit teams.

Data from this simple survey can produce three types of insights:

Where to focus: Identifying the location of specific integrity gaps — by both function and geography — can be extremely valuable. By analysing data on violations in these areas, companies can unearth the causes of misconduct and devise a strategy to address them — perhaps by redesigning incentives, creating new controls or conducting training.

Better ways for employees to voice concerns: While it may be obvious that norms will differ among countries, offices and even teams, figuring out how they differ and what to do about them is a challenge. Employees’ survey responses can help tackle this.

The true size of the iceberg: To prevent wrongdoing, you need to understand issues that may be developing below the surface. Yet it’s often difficult to know what kinds of problems are slipping through. The survey data can help companies’ better estimate the actual amount of misconduct within the organisation — and the amount that’s not being reported.

Many leaders publicise their firms’ commitment to integrity and say that their employees should feel empowered to speak up if they see something questionable. Yet the best leaders don’t rely on these statements alone. Instead they collect data to monitor and assess whether their organisations actually adhere to their ethical standards. Sustaining a company’s cultural integrity requires constant vigilance.


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