In 2015, I undertook an extensive literature review and interviewed 23 anticorruption experts and practitioners to explore a simple question: What does organizational culture look like in a corrupt company? My work was a direct challenge to the long-dominant “bad apple” or “rogue employee” explanation of corporate wrongdoing, focusing instead on the organizational and team conditions that undermine integrity. Subsequent corporate scandals—for example, regarding fake accounts at Wells Fargo or car emissions at Volkswagen—have illustrated the importance of overall culture, rather than individual traits, in driving or undermining integrity. Regulatory interest in the importance of organizational culture has increased. This post will explore the implications of my research study for regulators who seek to evaluate compliance programs.
My research (summarized in greater detail here (PDF: 193 KB) and here) found that although integrity scandals involving fraud, corruption, and other issues differ in cause and trajectory, they correlate consistently with particular organizational and team conditions. The archetypal corrupt team sits far from headquarters under a secretive, controlling leader. The team is widely regarded as successful and high-performing, but hoards information and avoids scrutiny. Members exhibit fierce loyalty to one another and are driven by a sense of urgency, fear, competitive pressure, and short time horizons.
Any culture is determined by the interaction of systems, norms, and values. Much is implicit, unspoken, even unconsciousness among its members, making it difficult for them to determine whether they are thriving in cool water, or frogs slowly boiling to death. Hierarchy and employee concerns over job security add to the challenges of evaluating a culture. Nonetheless, important proxy indicators can help us evaluate compliance processes and procedures.
Incentives
A corrupt culture fosters belief in growth at all costs; the ends justify the means. A company’s incentive structure probably offers the best indicator as to whether compliance is taken seriously. High sales targets set without regard to market or competitive dynamics are well-established red flags. One interviewee commented that “variable compensation based on sales is a disaster for corruption.” Emerging best practice from companies, including Novartis, suggests that incentives based on ethical conduct or social responsibility can be very effective, particularly at the senior executive level, though they must be given sufficient weight in the overall incentive structure. Best-practice governance systems specify clear roles for both compliance and Human Resources in building incentives.
Oversight
The status and effectiveness of groups that conduct oversight, manage risk, and set ethical direction provide a key indicator of whether a “culture of compliance” is in place. Practitioners have long advocated independence for the compliance function, along with a direct reporting line to the Board. While compliance teams have become better-resourced, scope creep demands that they address ever-broader challenges in values and behavior. Governance structures are worth a close look—not least, the role, remit, and meeting agendas of Board committees responsible for oversight of ethical issues. Leading companies are increasingly driving closer integration among audit, legal, and sustainability functions, aligning these teams beneath a single senior executive leader. Role clarity is indispensable for such models to be effective.
Leadership
In a corrupt culture, leadership is complacent and hierarchical. It hoards information and takes care to build plausible deniability. The existence of highly hierarchical authority systems may not indicate corruption in itself, but they can host cultures of fear in which employees are reluctant to express concerns. Data from whistleblowing lines can help implicate toxic power structures: Certain regions or groups may use them considerably less than their organization’s average, or there may no examples whatsoever of employees reporting concerns (even if unwarranted) about leaders. Such pockets of silence are hardly a sign that all is well; they might signify toxic authority structures whose teams are isolated from the wider organization by design or circumstance. An even brighter red flag is no track record of leaders having been disciplined or removed for unethical conduct.
Inclusion
A wealth of resources suggests that diverse teams make better, smarter decisions. Diversity of social identity and perspective reduces the likelihood for intense, internal loyalties that characterize corrupt teams. Still, quotas and diversity targets cannot trigger automatic improvement. More important is a focus on inclusion that invites employees to “bring their whole selves to work,” regardless of social identity. This, in turn, feeds employees’ psychological safety, reducing dissonance between personal and organizational values. As investors press companies to focus on increased diversity and inclusion, organizational resistance can indicate that all is not well.
Norms and Values
As has been rightly argued, employee-engagement surveys have limits in measuring cultures of compliance. They are not primarily designed for this purpose. But with targeted culture surveys still relatively rare, employee-engagement results can give us important clues about staff perceptions of leadership, pride in the organization, role stress, and fear of speaking out. A weak response rate from a certain division or region can indicate a lack of trust that HR will honor confidentiality commitments—itself a sign that digging is warranted. Asking employees to comment on what is unique about their organization’s culture is just one seemingly bland interview question that can yield useful insights.
Stakeholder Trust
Third-party due diligence checks are considered a must-have in any good compliance program. Regulators emphasize the need to ensure that they are risk-based and proportionate. Still, thorough due diligence, particularly in markets that lack robust public records (most), remains a complex, expensive process marked by methodological and practical limitations. (Notwithstanding improvements in both automated diligence tools and overall corporate transparency, we are far from having a cost-effective approach to determine beneficial ownership, to cite just one example.) It might be more effective—and easier—to gauge the level of stakeholder trust in an organization to derive an excellent proxy indicator of a company’s perceived integrity and broader attitude to society. It may seem obvious that companies that pay bribes are also likely to violate labor or environmental standards, but the link between ethics and social responsibility is too rarely recognized in compliance assessments. Over time, employees acquire a deep, implicit sense of whether their organization treats its suppliers, customers, and other stakeholders with respect. They tend to know if it effectively “lives its values,” and respond accordingly.
What these proxy indicators all share is that they can provide clues to where investigators and regulators might consider digging deeper. The investigative toolkit of interviews, audits, transaction reviews, and eDiscovery is useful and will not soon be supplanted, but the prevailing “boil the ocean” approach seems to benefit the compliance-consulting industry far more than it serves corporations. A human behavior lens is a useful, overdue addition for anyone seeking to build compliance programs that are more relevant, effective, and aligned with how real people think and behave.
Alison Taylor is a Managing Director at BSR and an Adjunct Professor at Fordham Law School and the Gabelli Business School.
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