Jim Nortz, BridgeTower Media Newswires
Systemic corporate corruption, exemplified by the recent Wells Fargo and Volkswagen scandals, are not the result of a few rogue employees’ clandestine misdeeds. Instead, systemic corporate corruption involves the actions of hundreds, if not thousands of individuals at every level in the organization who are complicit in the fraudulent schemes. Sadly, such systemic corruption is not rare. In fact, it has been and continues to be a scourge that has persisted at approximately the same rate for decades and at some of the most prestigious corporations in the world.
Although Wells Fargo and Volkswagen are the scandals du jour, virtually every other large bank and automobile manufacturer has been caught and fined hundreds of millions, and in some cases billions, for their misdeeds.
And the same is true for many other industries stretching back decades. Virtually every major pharmaceutical and medical device company, for example, has been caught and punished severely for paying bribes to doctors and making false claims about their products.
Despite millions invested in compliance and ethics programs to prevent systemic corporate corruption, it is difficult to find evidence of any improvement in corporate compliance and ethics performance. Judging from monetary recoveries related to corporate Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs), the trend over the last 18 years has been in the opposite direction.
There is also a disappointing trend with respect to corporate fraud prosecutions. In 2018, the Department of Justice recovered $2.9 billion—on par with record amounts collected in past years. Moreover, the data show no reduction in the annual number of False Claims Act actions for the last 31 years.
Nor is there evidence of reductions in Foreign Corrupt Practices Act (FCPA) and FCPA-related enforcement actions.
Admittedly, these data do not represent the universe of corporate malfeasance, and there are likely multiple variables driving the numbers such as changing governmental enforcement priorities. But, regardless of where you look, one is hard pressed to find any data evidencing corporate compliance and ethics performance improvement.
The steady volume of material corporate wrongdoing by some of the most respected firms in the world is not attributable to a dearth of policies and procedures or compliance and ethics programs. In the last few decades, corporations have produced mountains of such governance documents and invested in thousands of formal compliance and ethics programs. I also don’t believe that systemic misconduct is the product of wickedness on the part of business professionals. Instead, I believe the root cause is a failure of leadership at the top to build and sustain corporate cultures in which significant legal and ethical lapses would be unthinkable even in the face of significant pressure to meet commercial goals. It is time for directors to stop pointing the finger at others and look in the mirror. The current governance model is consistently failing all our stakeholders—our shareholders, our employees, our customers, our suppliers and the communities in which we operate.
To improve corporate compliance and ethics performance, corporate boards must substantially improve their effectiveness in managing legal and ethical risks. Getting hundreds, or thousands of individuals in any organization to consistently play by the rules is not a trivial exercise—especially in the face of constant pressure to perform. It cannot be achieved by merely publishing codes of conduct, employee training or by compliance officers’ periodic audit committee reports. By themselves, these activities do nothing to drive employee behavior. Instead, directors must take deliberate actions to build and sustain strong ethical cultures by exploiting the power of two key social dynamics; “response to authority” and “conformity to social norms.”
Organizational psychologists have known for decades that social dynamics are the primary drivers of human behavior for good or ill. As Philip Zimbardo observes in his book, “The Lucifer Effect,” systemic institutional misconduct is not caused by “a few bad apples” in the barrel, it’s the result of the “power elite”—the “barrel makers.”
Boards of directors are the corporation’s barrel makers. This task cannot be outsourced to compliance and ethics departments. Only the board has the authority and the legal mandate to ensure their corporate barrels promote a strong ethical culture in which “good apples” thrive and “bad apples” can’t survive.
To achieve this end, boards must find an effective way to gauge the strength of their firms’ ethical culture. Then, they must set specific cultural performance targets and hold management accountable for meeting them. As a director, don’t get distracted by reports of how many person hours of compliance training are administered or how many feet are added to the stack of corporate policies and procedures. None of this matters if the corporation has a persistently weak ethical culture.
If, after a reasonable time period, the management team cannot build and sustain a strong ethical culture, directors must seriously contemplate making a management change even if the company is otherwise successful in driving business performance. As history shows, corporate boards that rank financial performance above ethical performance and fail to hold management accountable virtually guarantee catastrophe.
By taking the steps to build better barrels, you will not only provide effective compliance and ethics oversight, you will also reduce the chances that your firm will be the next to make headlines for all the wrong reasons.
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Jim Nortz is president of Optimal Compliance & Ethics Solutions, LLC—a firm dedicated to helping businesses minimize risk and maximize performance. He can be reached at 585-260-8960 or jimnortz@ gmail.com.
