Why a Strong Corporate Ethical Framework is Good for Business

“The message is quite clear — the world is changing, and with that change there is an expectation from a wide range of stakeholders,” said Laura Davies in her session on corporate ethical frameworks at the 2017 ACFE Fraud Conference Europe. “There has been a big breakdown of trust between business and the general public.”

Davies, Director of Fraud at Huntswood, explained that understanding the current global landscape and putting an emphasis on culture is a step in the right direction for anti-fraud experts and organizations. Davies shared examples of recent scandals where consumer trust has been deeply shaken. Most recently, Volkswagen (VW) has been dealing with the fallout from their diesel emissions scandal.  

“What’s so shocking about this case is that VW is such a trusted brand,” Davies shared with attendees. For VW, the company itself has been hugely impacted since they pleaded guilty on March 10, 2017, to charges of conspiracy to commit fraud, obstruction of justice and entry of goods by false statement.

Since peak of production in 2015, just before news of the scandal first leaked, shares have dropped 45 percent, they have massive settlements and they’re facing litigation in the U.K. and EU. Most importantly, consumer opinion of the brand has completely changed. Autolist surveyed vehicle owners on perception and determined that, “Overall perception of German engineering was down 18 percent. Perception of vehicle quality was down 27 percent, willingness to buy a Volkswagen down 28 percent and trust in the automobile industry down 12 percent.” As these statistics show, one scandal can negatively affect an entire industry.

Unfortunately, this is not an isolated incident. Davies reminded her audience that VW is not the only global corporation involved in such a massive scandal. She took her examples all the way back to WorldCom in 2002, stating that after more than 15 years of these shocking, destructive, far-reaching scandals, the public’s trust has eroded to a new low and we’ve started to see some political backlash and upheaval across the world.

To tie it back into fraud, Davies shared some sobering statistics. According to the Office for National Statistics, in 2016, there were 5.8 million events of fraud and cybercrime in the U.K. alone. There were 3 million adult victims and 53 percent of people over 65 believed they’d been targeted by fraudsters. “The scariest statistic on here,” Davies said, “is that in the U.K. you are more likely to be a victim of fraud than you are any other type of crime.”

So when we think about culture and how it relates to ethics, an organization’s culture doesn’t exist in a vacuum. “It’s not whether an organization is good or bad. It’s about the overall picture of how it lives and breathes its values.” The global landscape plays a huge role in how an organization — or even an entire industry — is perceived by the public, by its own employees and by stakeholders.

Davies pointed out that when there’s a huge difference between what executives make and what people on the shop floor make, it creates a significant impact on people’s ability to rationalize their misconduct. According to Davies, one of the most common reasons individuals commit fraud is because they feel they aren’t paid enough.

To add a bit of hope to her presentation, Davies shared an example of how businesses can take responsibility for altering this bleak view of global corporations. BlackRock, the largest investment firm in the world ($5.1 trillion in assets under management) sent out a letter to the chairmen of all companies in the FTSE 350 saying that if organizations can’t provide a clear reason for why executives would be paid certain amounts, their request for funds would be blocked. While it’s not an overnight solution, the U.K. has seen a small bit of change. For instance, one company withdrew their request to increase the CEO’s salary from $5.5 million to $8.5 million. Several other companies have either been blocked or asked to review their proposals.

This is a small step, but Davies reiterated several times that in order for an ethics framework to exist and succeed, the values at the top must align with the values throughout the rest of organization.

Davies shared a list of common pitfalls to look out for in the cultures of organizations, which can lead to higher instances of fraud.

1. Culture isn’t a consideration at all.
2. The board and senior management do not live the desired values of the company.
3. Lack of challenge to senior management.
4. Lack of ethics, anti-fraud and whistleblowing policies.
5. No emphasis on staff taking responsibility for detecting and reporting.
6. Ineffective or lack of procedures in place for reporting.
7. Flawed incentivization schemes.
8. Poorly designed training (especially for a diverse workforce).

That’s where creating an ethical framework comes into play. It’s actually a two-step process. You start with an assessment to figure out where your organization’s culture currently exists. Unfortunately, many organizations stop there, but in order to give this assessment purpose, an organization must implement changes and stick with those changes. “A lot of organizations think if you set out to have a new way of thinking around values and culture, then that’s something that’s going to be immediate,” Davies said. “It’s not going to be immediate.”

She recommended that companies hire a team to help them manage the change, and because these changes would be so large, she guessed it would probably be a 3- to 5-year process before businesses saw a measurable impact on their bottom lines.

To leave her audience with some food for thought, she finished by sharing nine vital questions to ask when assessing your organization's current culture:

• Is your code of conduct fit for purpose and how is it communicated? Is it communicated just to your employees or is it also communicated to your wider range of stakeholders?
• How do you assess that the relevant codes and policies are understood by the people that need to abide by them?
• What training is given to people around ethics and culture?
• How does your organization reward risk-taking behavior?
• What does the pay reward at the top communicate toward the bottom? And what kind of effect does that have on the culture?
• How is the board’s risk appetite communicated across the organization? Do people within the company know what level of risk the company is willing to take? Or is that something people are just expected to understand?
• What risk does your operating model create?
• What messaging and training is disseminated to different types of people?
• How are lessons learned and then translated throughout the rest of the organization?

This is only a starting-off point, she advised, and is by no means the exhaustive list. Her final piece of advice was, “Looking at culture is a healthy thing to do, and it’s better to do it now rather than wait for a crisis to hit.”