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CORPORATE INTEGRITY PRACTICE
COMPLIANCE AND ETHICS LEADERSHIP COUNCIL
Ethical Leadership
The Important Links Between Cultu...
A FRAMEWORK FOR MEMBER CONVERSATIONS
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[502] Ethical Leadership: The Important Links Between Culture, Risk Management, & Business Performance SCCE Compliance & Ethics Institute 2011

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[502] Ethical Leadership: The Important Links Between Culture, Risk Management, & Business Performance SCCE Compliance & Ethics Institute 2011

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[502] Ethical Leadership: The Important Links Between Culture, Risk Management, & Business Performance SCCE Compliance & Ethics Institute 2011

  1. 1. CORPORATE INTEGRITY PRACTICE COMPLIANCE AND ETHICS LEADERSHIP COUNCIL Ethical Leadership The Important Links Between Culture, Risk Management, and Business Performance 13 September 2011
  2. 2. A FRAMEWORK FOR MEMBER CONVERSATIONS The mission of the Corporate Executive Board is to create revolutionary economic advantage for leaders of the world’s great enterprises by enabling them to act with unparalleled intelligence and confidence. We lift their performance at key decision points and career moments by delivering insight drawn from the most powerful global executive and professional network. When we bring leaders together, it is crucial that our discussions neither restrict competition nor improperly share inside information. All other conversations are welcomed and encouraged. We look forward to the continued and robust sharing of insights by member executives and professionals at Corporate Executive Board events. COPIES AND COPYRIGHT As always, members are welcome to an unlimited number of copies of the materials contained within this handout. Furthermore, members may copy any graphic herein for their own internal purpose. The Corporate Executive Board Company requests only that members retain the copyright mark on all pages produced. Please contact your Member Support Center at +1-866-913-8103 for any help we may provide. The pages herein are the property of The Corporate Executive Board Company. Beyond the membership, no copyrighted materials of The Corporate Executive Board Company may be reproduced without prior approval. LEGAL CAVEAT The Compliance and Ethics Leadership Council has worked to ensure the accuracy of the information it provides to its members. This report relies upon data obtained from many sources, however, and the Compliance and Ethics Leadership Council cannot guarantee the accuracy of the information or its analysis in all cases. Furthermore, the Compliance and Ethics Leadership Council is not engaged in rendering legal, accounting, or other professional services. Its reports should not be construed as professional advice on any particular set of facts or circumstances. Members requiring such services are advised to consult an appropriate professional. Neither The Corporate Executive Board Company nor its programs are responsible for any claims or losses that may arise from a) any errors or omissions in their reports, whether caused by the Compliance and Ethics Leadership Council or its sources, or b) reliance upon any recommendation made by the Compliance and Ethics Leadership Council.
  3. 3. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 3 Without clearly defining and measuring corporate culture, compliance officers fail to properly identify and incent the behavioral competencies with the greatest impact on corporate compliance and business outcomes. ROAD MAP FOR OUR MATERIALS Section I: Using Cultural Indicators to Improve Compliance Risk Management Section II: Fostering and Encouraging Critical Behaviors in Leaders Section III: Exploring the Links Between Business Performance and Culture Key Question: How does corporate culture impact the likelihood of compliance risks? Key Question: How can I identify the most important leadership competencies and ensure that managers correctly model them with staff? Key Question: Are there links between business performance and culture? If so, what are they?
  4. 4. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 4 To date, companies have invested significant resources in risk management but are not uniformly satisfied with the results. ■ An emphasis on process may create a “check the box” attitude that actually limits employee accountability for failures. THE STATE OF COMPLIANCE RISK MANAGEMENT SYSTEMS Level of Satisfaction with Compliance Risk Assessment Percentage of Compliance Officers, 2008 Enterprise Risk Management Identifying Emerging Risks Creating/Disseminating Employee Surveys Tracking Regulatory Developments Designing Compliance Controls/Monitoring Systems Compliance Risk Assessment 61% 37% 25% 67% 23% 64% 18% 57% 15% 80% 9% 78% 14% Unsatisfied 35% Neutral 80% Risk Processes 51%  Satisfied 20%  Active Risk Management Senior management spend 80% of their time on risk processes (completing forms and evaluating risks) and only 20% of their energy actively managing risks and opportunities. Most Common Risk Detection Activities Compliance Officers Owning or Participating in Activity, 2008 Management and Board Resource Allocation Related to Risk Management Corporate Executive Board Survey, 2009 Own Activity Participate in Activity n = 114. n = 114.
  5. 5. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 5 Even the best risk management model or process is only as strong as the people supplying the initial inputs. ■ Risk management process is important but should not be fundamentally elevated above creating a risk-addressing culture that improves business decision making. ■ Even as these risk management lessons are considered, the consequences and likelihood of compliance risk have increased through: – Greater regulatory enforcement and fining authority – Rising regulatory complexity and scope of doing business – Pressure for new revenue in slow growth economies LESSONS FROM RECENT RISK MANAGEMENT FAILURES Elevating Process Over Judgment— Risk management often devolves into a “check-the-box exercise” that, at worst, diffuses—rather than enhances—accountability for risk. Succumbing to Herd Behavior— Corporate and individual incentives lead organizations to closely follow the trends and business decisions of peers. Fighting the Last War—Managers tend to focus on risks that are most recent and familiar to them as opposed to looking for new, over- the-horizon risks. Siloing Information—Managers often fail to seek or heed contrary information from a different perspective. 1 3 2 4 “With hindsight we can now see that the risk management catastrophes of the past three years were not due to insufficient investment in IT or analytic systems, but the failure to bring collective human judgment to bear on critical decisions. In fact, companies’ current focus on compliance process—in reaction to regulatory zeal—is likely to give Boards and shareholders false confidence about their risk defenses.” Tom Monahan CEO, The Corporate Executive Board Company
  6. 6. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 6 While noncompliance and misconduct stem from many factors, organizational culture, not process failure, often lies at its root. ■ Pressure and rationalization can be reduced by promoting a strong sense of ethical behavior amongst employees and creating a positive work environment. ■ Past CELC research found that the most significant forms of noncompliance stem from intentional employee actions, suggesting the limits of control and awareness based mitigation strategies. CULTURE IS A ROOT CAUSE OF MISCONDUCT Three Underlying Conditions for Business Misconduct and Their Cultural Components Rationalization: The ability of an employee to intellectually justify an intentional act of business misconduct Pressure: The motive or incentive for employees to commit misconduct Opportunity: The ease with which an employee can commit misconduct BUSINESS MISCONDUCT Cultural Component— Corporate culture, as much as policies and controls, establishes the standards for acceptable employee behavior Cultural Component— Disengaged employees are better able to rationalize antisocial behavior targeted against company. Cultural Component— Cultures of integrity emphasize strong business performance obtained in a compliant, ethical manner. Source: Based on the Fraud Triangle, developed by Donald Cressy.
  7. 7. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 7 Corporate culture and employee behaviors significantly influence both risk management systems and business outcomes. ■ Risk management processes and systems are ultimately only as strong as the people controlling them. ■ Effective risk management systems simply move relevant information from the “informed” to the empowered (senior management) in a timely manner. CULTURE IMPROVES MORE THAN COMPLIANCE RISK MANAGEMENT Corporate Culture Risk Management Business Performance Lower Compliance Misconduct— CELC research finds that employees in higher integrity cultures are 67% less likely to observe significant instances of business misconduct than employees in lower integrity cultures. Improved Risk Detection—CELC research finds that employees in higher integrity cultures are more likely to report noncompliance and operational failures than employees in lower integrity cultures. Higher Employee Productivity— Joint CELC and CLC Human Resources research finds that managers that exhibit corporate values can improve employees’ performance by 12%. Better Strategic Management— Corporate Executive Board research reveals that companies with strong openness of communication deliver shareholder returns five percentage- points higher than their peers. Improved Business Performance— CELC data analysis finds positive correlations between business performance and specific aspects of corporate culture.
  8. 8. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 8 Even when culture is recognized as important, few compliance officers know how to effectively define, measure, and foster it. BREAKING DOWN THE PROBLEM Measuring and Fostering Culture: Principal Challenges for Compliance Officers “Through our surveying and analysis efforts, we have taken something fuzzy [corporate culture] and given it some clarity. We also found that key behaviors are in fact highly correlated with increased levels of business misconduct. This understanding made a significant contribution to our compliance program and our company.” Chief Compliance Officer Insurance Company “I became the CEO and we moved from substantial loss to substantial profit within 12 months—primarily because we created a culture of open, instant, and direct communications. There is no company for which open communications is not the right answer—and it is a major strategic weapon if you decide to unleash it.” CEO Health Services Company “You do not have a rigorous ethics culture and open environment just because you have a code of conduct. It starts with managers championing ethical behavior and modeling it at every opportunity.” Chief Ethics and Compliance Officer Pharmaceutical Company Hard to Define Culture ■ Hard to collect the necessary data ■ Difficult to assess behavior objectively ■ Hard to determine which behaviors/competencies have greatest impact on compliance risk Hard to Embed Desired Behaviors ■ Leaders do not appreciate the importance of culture ■ Leaders are insufficiently accountable for compliance and ethics ■ Leaders do not know how to model the desired behaviors with staff Hard to Translate Measurement into Action ■ Certain employee behaviors are not viewed as critical to business success ■ Difficult to determine the specific behaviors important to sustainable corporate growth
  9. 9. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 9 Without clearly defining and measuring corporate culture, compliance officers fail to properly identify and incent the behavioral competencies with the greatest impact on corporate compliance and business outcomes. ROAD MAP FOR OUR MATERIALS: BEGINNING SECTION I Section I: Using Cultural Indicators to Improve Compliance Risk Management Section II: Fostering and Encouraging Critical Behaviors in Leaders Section III: Exploring the Links Between Business Performance and Culture Key Question: How does corporate culture impact the likelihood of compliance risks? Key Question: How can I identify the most important leadership competencies and ensure that managers correctly model them with staff? Key Question: Are there links between business performance and culture? If so, what are they? Section includes: ■ Data analysis highlighting the impact of culture on the likelihood of significant compliance risks
  10. 10. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 10 IDENTIFYING THE FACTORS THAT DRIVE MISCONDUCT AND INTEGRITY Council’s Study Model Our initial research, identified the leading indicators of misconduct, as well as the key integrity attributes. ■ After examining more than 50 factors that could affect misconduct and integrity levels, CELC determined that only a few had significant influence. ■ CELC defined the factors with a significant impact on misconduct and reporting rates as a measure of a culture of integrity. EmployeeDepartmentOrganization Training Effectiveness Awareness of Policies and Procedures Amount of Training Applicability of Training to Work Clarity of Expectations and Disciplinary Guidelines Respect for Employees Integrity in Leadership Communication Style Operational Management Accountability and Responsiveness Control Environment Profit Growth Credit Rating Accountability and Responsiveness Cost Pressure Size Risk Level Willingness to Compromise Ethics for Power and Control Commitment to Job Versus Commitment to Company Empathy Moral Awareness Moral Character Self-Interest Pressure from Manager Commitment to Company Commitment to Manager Commitment to Job Discontent with Job Satisfaction with Compensation Percentage of Variable Compensation Financial Pressure Employee Demographics Accountability and Responsive- ness Integrity in Leadership Level of Trust and Respect for Employees Communi- cation Style Fairness Interaction with Employees Operational Management Personal Drive Degree of Fear of Retaliation and Discomfort Speaking Up Performance Culture Open Communication Perceptions of Organizational Justice Perceptions of Support and Clarity of Purpose Achievability of Targets and Tasks Work Environment Organizational Pressure Departmental Pressure Employee Engagement Compensation, Financial Pressure, and Demographics Climate Direct Manager Competency Company Culture Strength of Senior Leaders Financial Controls and Company Characteristics Compliance and Integrity Training and Communications Leading Indicators of Misconduct Key Integrity Attributes
  11. 11. 11 From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 1 The 18 questions of the integrity index are scored on a seven-point scale from 1 (weakest value) to 7 (strongest value) and collectively serve as a proxy for the cultural health of organizations. Additional components of the cultural index are listed in the Appendix. DECONSTRUCTING THE COMPONENTS OF INTEGRITY The Cultural Diagnostic Survey Analyzes the Strength of Key Attributes That Impact a Culture of Integrity Employees’ degree of agreement that: ■ Their company’s disciplinary guidelines have been clearly communicated to them and/or they are aware of the consequences of misconduct. ■ Ethical expectations have been clearly communicated to them by their company. Employees’ degree of agreement that: ■ They can report unethical behavior or practices without fear of retaliation at their company. ■ They feel comfortable reaching out to someone at their company to seek advice about ethical dilemmas or concerns. Employees’ degree of agreement that: ■ Their departmental colleagues are not willing to tell a lie to advance in the company. ■ In their department, power is not more important than honesty. Employees’ degree of agreement that: ■ Their manager respects his/her employees. ■ Their manager is honest and possesses integrity. ■ Their manager listens carefully to the opinions of others. ■ Their manager holds people accountable. Employees’ degree of agreement that: ■ Senior leaders at their company are honest and possess integrity. ■ Senior leaders at their company take appropriate action upon unethical or inappropriate behaviors and practices. ■ Senior leaders at their company respect employees. ■ Senior leaders at their company listen carefully to the opinions of others. INTEGRITY INDEX1 Clarity of Expectations Comfort Speaking Up Openness of Communication Trust in Colleagues Organizational Justice Direct Manager Leadership Tone at the Top Employees’ degree of agreement that: ■ They are encouraged to share their opinion on important issues facing the company. ■ Managers in their company are willing to share all important information with their employees. Employees’ degree of agreement that: ■ Their company responds quickly and consistently to verified or proven unethical behavior. ■ Unethical behavior is not tolerated in their department.
  12. 12. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 12 IMPROVING CULTURE REDUCES MISCONDUCT Distribution of Employees By Overall Perception of Culture Percentage of 2009 Respondents in Each Category and Their Corresponding Observation/Reporting Rates Employees with “Least Favorable” perceptions of company culture are nearly 10 times more likely to observe misconduct than employees with “Most Favorable” perceptions of culture. ■ Interestingly, employees with “Neutral” perceptions are the group most likely to answer “don’t know” when asked if they observed misconduct at their company in the past year. This suggests that “Neutral” employees lack the awareness needed to identify misconduct in the workplace. ■ The solution for improving perceptions of corporate Integrity for “Neutral” employees should include training and communications that address what constitutes misconduct in the workplace, as well as the importance of reporting. 10.1% 23.7% 61.6% Observation Rate1 — Yes 61.8% 33.9% 16.6% 7.2% Observation Rate2 —Don’t Know 23.0% 31.7% 24.2% 9.5% Reporting Rate3 44.9% 45.6% 51.2% 70.5% 4.6% Least Favorable Neutral Moderately Favorable Most Favorable n = 109,281 from 2009. 1 Percentage of employees within category who observed misconduct in past year. 2 Percentage of employees within category who responded “Don’t Know” when asked if they had observed misconduct over the past year. 3 Percentage of employees within category who reported the misconduct they observed.
  13. 13. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 13 Without clearly defining and measuring corporate culture, compliance officers fail to properly identify and incent the behavioral competencies with the greatest impact on corporate compliance and business outcomes. ROAD MAP FOR OUR MATERIALS: BEGINNING SECTION II Section I: Using Cultural Indicators to Improve Compliance Risk Management Section II: Fostering and Encouraging Critical Behaviors in Leaders Section III: Exploring the Links Between Business Performance and Culture Key Question: How does corporate culture impact the likelihood of compliance risks? Key Question: How can I identify the most important leadership competencies and ensure that managers correctly model them with staff? Key Question: Are there links between business performance and culture? If so, what are they? Section includes: ■ Guidelines for aligning performance with critical behaviors
  14. 14. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 14 WHAT IS ESSENTIAL TO ETHICAL LEADERSHIP? Leadership Competencies Possible Competencies That Could Drive a Culture of Integrity and Reduce the Likelihood of Misconduct After reviewing the literature, CELC cataloged all of the potential drivers of ethical leadership that we could test on an employee survey. Reputation within the company Question: Which leadership competencies matter most when it comes to driving a culture of integrity and reducing the likelihood of misconduct? Role model for proper business conduct Setting an appropriate ethical tone Honesty Clearly communicating expectations Skill in managing the company Taking action on verified unethical conduct Commitment to diversity Accepting responsibility for successes and failures Friendliness and approachability Intelligence Passion to succeed Respecting and trusting employees Treating direct reports the same Recognizing and rewarding achievement Accurately evaluating employee performance Encouraging employee development Listening carefully to the opinions of others Defending direct reports Valuing work–life balance Do not proceed to the next page yet... First, circle the four leadership competencies you believe matter most when it comes to individual managers driving a culture of integrity, reducing the likelihood of misconduct, and potentially improving overall business performance. STOP
  15. 15. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 15 DEFINING ETHICAL LEADERSHIP Leadership Competencies Highlighted Terms Indicate Competencies That Actually Drive an Ethical Culture and Reduce the Likelihood of Misconduct There are four key leadership competencies that drive a culture of integrity and reduce the likelihood of misconduct ■ The council defines “Ethical Leadership” as those managerial attributes which inspire employees to deliver high–performance results against business objectives while embodying the values of the organization. Reputation within the company Role model for proper business conduct Setting an appropriate ethical tone Honesty Clearly communicating expectations Skill in managing the company Taking action on verified unethical conduct Commitment to diversity Accepting responsibility for successes and failures Friendliness and approachability Intelligence Passion to succeed Respecting and trusting employees Treating direct reports the same Recognizing and rewarding achievement Accurately evaluating employee performance Encouraging employee development Listening carefully to the opinions of others Defending direct reports Valuing work–life balance
  16. 16. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 16 An employee who perceives strong tone at the top is more likely to be strongly committed to corporate values. COMMITMENT TO CORPORATE VALUES TIED TO TONE AT THE TOP Scatter Plot of Correlation Between Tone at the Top and Commitment to Corporate Values Illustrative What the Numbers Mean Employees view the actions of senior executives as synonymous with actions made by “the company.” Leverage this overlap in perception by encouraging senior leaders to drive commitment to corporate values—thereby also driving employees’ commitment to company. Weak Strong Weak Strong Tone at the Top Commitment to Corporate Values
  17. 17. 17 From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN FOSTERING ETHICAL LEADERSHIP Overview of Key Principles Key Challenge CELC Guidelines Approaches for Discussion Incenting the Right Values Guideline #1: Define key leadership competencies Guideline #2: Test key leadership behaviors Guideline #3: Create accountability for leadership competencies Guideline #4: Tailor integrity expectations to role Training Leaders to Model and Drive the Values Guideline #5: Leverage managers to make integrity locally relevant Guideline #6: Provide resources to support leaders’ ability to model the correct behaviors
  18. 18. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 18 BENEFITS OF A LEADERSHIP COMPETENCY APPROACH Core Behavioral Attributes Influencing Misconduct Levels and Business Results Illustrative Organizations seeking to reduce misconduct and drive business performance should overinvest in fostering the small set of attributes that impact both areas. ■ As companies can realistically emphasize only a few key organizational values, it’s even more important that the integrity attributes organizations select and champion have genuine impact on misconduct levels and business results. Ethical Leadership Competencies Source: Compliance and Ethics Leadership Council research, 2010; Corporate Leadership Council Research, 2009. Four Key Components of Ethical Leadership ■ Honesty and integrity ■ Taking action on verified unethical conduct ■ Respecting and trusting employees ■ Listening carefully to the opinions of others Human Resources Benefits of Ethical Leadership ■ Improved Discretionary Effort/Performance The top two managerial characteristics that drive employee performance are “manager demonstrates corporate values” and “manager demonstrates ethical behavior,” improving the discretionary effort of their employees by 12% and 9%, respectively. ■ Higher Employee Engagement Employees perceptions that their workplace is ethical, drive commitment to their organizations by 40%. Social responsibility and environmental responsibility both drive commitment by 32%. ■ Better Talent Attraction 17% of job applicants selected “ethics” when asked to rate the top five attributes for assessing potential employers. Compliance Benefits of Ethical Leadership ■ Reduced Misconduct Employees in low-integrity cultures observe between two to four times as many instances of misconduct (in the most significant compliance areas such as conflicts of interest and insider trading) than their peers in high integrity cultures. ■ Improved Detection and Information Flows Employees in high-integrity cultures are 25.6% more likely to report misconduct when they have observed it than peers in low integrity cultures.
  19. 19. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 19 Without clearly defining and measuring corporate culture, compliance officers fail to properly identify and incent the behavioral competencies with the greatest impact on corporate compliance and business outcomes. ROAD MAP FOR OUR MATERIALS: BEGINNING SECTION III Section I: Using Cultural Indicators to Improve Compliance Risk Management Section II: Fostering and Encouraging Critical Behaviors in Leaders Section III: Exploring the Links Between Business Performance and Culture Key Question: How does corporate culture impact the likelihood of compliance risks? Key Question: How can I identify the most important leadership competencies and ensure that managers correctly model them with staff? Key Question: Are there links between business performance and culture? If so, what are they? Section includes: ■ Analysis of connections between integrity components and long- term corporate performance ■ A look at the connection between “Tone at the Top” and company financial strength
  20. 20. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 20 SMALL DIFFERENCES, BIG CONSEQUENCES IntegrityIndexScore Individual Company Score Relative to Employees at Top Quartile Companies, Employees at Bottom Quartile Companies Are… 1.6 times as likely to observe misconduct. Two times as likely to observe HR–related misconduct. Three times as likely to observe misconduct in high-risk compliance areas such as conflicts of interest or accounting irregularities. Bottom Quartile (25th Percentile) Top Quartile (75th Percentile) Even relatively small changes in Integrity Index scores are linked to significant differences in misconduct levels. ■ A few ethical missteps can have a significant impact on overall employee perceptions of a company’s culture of integrity and can increase the company’s risk profile. 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2
  21. 21. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 21 The Overall Integrity Index Score, as well as four components of an ethical culture— comfort speaking up, direct manager leadership, openness of communication and tone at the top—have significant correlations with 10-year total shareholder return and company financial strength. THE RELATIONSHIP BETWEEN CULTURE AND BUSINESS PERFORMANCE Business Performance and Ethical Culture Metrics with a Significant Correlation to Each Other 1 10-Year TSR: The total return on an investment, including income from dividends and interest, as well as appreciation or depreciation in price of the security, over 10 years. 2 Financial Strength: A measure of risk. Percentile rank relative to 8,000 publicly traded companies based on fifteen separate factors involving growth, profitability, accounting quality, and size. A financial strength rating of 0 is the lowest and 100 is the highest. Measure of Ethical Culture Business Performance Metrics ■ Overall Integrity Index Snapshot Variables ■ EBITDA ■ P/E Ratio ■ Consensus Growth ■ Enterprise Value ■ Target Cost of Equity Capital ■ Debt to Total Capital Ratio ■ Credit Rating ■ Appreciation Potential Score ■ Power Rating ■ Financial Strength Time–Series Variables ■ One-Year TSR ■ Three-Year TSR ■ Five-Year TSR ■ 10-Year TSR
  22. 22. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 22 The data suggests a connection between health of corporate culture and total shareholder return. ■ While one-year, three- year and five-tear total shareholder returns have modest levels of statistical significance and are positively correlated with Integrity Index levels, 10-year total shareholder returns have a strong, highly significant correlation with Integrity Index levels. n = 48. IS CULTURE A LONG-TERM INVESTMENT? Integrity Index Score and 10-Year Total Shareholder Return 10-Year TSR (Percentage) Overall Integrity Index Score Correlation (r) = 0.58 Significance Level of Correlation: P-value = 0.00 (40) (30) (20) (10) 0 10 20 30 5.0 5.2 5.4 5.6 5.8 6.0 6.2
  23. 23. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 23 Top quartile companies outperformed the bottom quartile companies by more than 16 percentage points in 10-year total shareholder return. HIGHER INTEGRITY, STRONGER LONG-TERM TOTAL SHAREHOLDER RETURNS Average 10-Year Total Shareholder Return for Bottom and Top Quartile of 34 Companies (7.4%) 8.8% Top Quartile of Integrity Index Bottom Quartile of Integrity Index Correlation (r) = 0.58 Significance level of Correlation: P-value < 0.01 n = 34. Culture as Competitive Advantage? While promoting a culture of integrity may not always be a high corporate priority, failure to properly engage with employees represents a strategic (as well as compliance) risk that threatens long-term competitive advantage.
  24. 24. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 24 COMFORT SPEAKING UP HAS THE STRONGEST RELATIONSHIP WITH LONG-TERM TSR Relationship Between Comfort Speaking up and Long-Term TSR For every 0.2-point increase in the comfort speaking-up score, companies tend to see a five-percentage point increase in average 10- year total shareholder return. ■ Comfort speaking up is employees’ degree of agreement that – They can report unethical behavior or practices without fear of retaliation at their company and – They feel comfortable reaching out to someone at their company to seek advice about ethical dilemmas or concerns. 10-YearTSR Comfort Speaking Up Score (40) (30) (20) (10) 0 10 20 30 5 5.2 5.4 5.6 5.8 6 6.2 6.4 Correlation (r) = 0.60 Significance level of Correlation: P-value < 0.01 n = 34. Potential Drivers Comfort speaking up: ■ Enables focus on accountability and product quality over individual reputation ■ Creates greater sense of trust and purpose ■ Fosters a problem-solving culture; driving innovation, performance, and risk mitigation +28 Percentage Points
  25. 25. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 25 Employee perceptions of the culture of integrity at their company has a strong relationship with the financial strength of their company. INTEGRITY IS TIED TO FINANCIAL STRENGTH1 Relationship Between a Company’s Overall Integrity Index Score and Its Measure of Financial Strength FinancialStrength Overall Integrity Index Score 0 10 20 30 40 50 60 70 80 90 100 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2 Correlation (r) = 0.54 Significance level of Correlation: P-value < 0.01 n = 48. 1 Definition of Financial Strength is available in the Appendix, page A-7.
  26. 26. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 26 QUESTION I: HOW COULD CULTURE AFFECT BUSINESS PERFORMANCE? While a healthy culture can drive stronger business performance, a weak culture of integrity can hinder business performance. Potential Driver #1: Employee Engagement—Positive employee perceptions drive higher levels of employee commitment to organization, employee performance and operational efficiency Potential Driver #2: Information Flow—Stronger culture results in information moving more efficiently through the organization, provide complete information to decision makers. Potential Driver #3: Reputational Benefits—Stronger cultures result in a more engaged workforce that attracts more customers, investors and better suppliers. Strong business performance Strong employee perceptions of culture of integrity
  27. 27. From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN 27 QUESTION II: HOW COULD BUSINESS PERFORMANCE AFFECT CULTURE? Struggling businesses may experience heightened levels of risk and misconduct. ■ Conversely, a company with strong business performance may experience a boost in its corporate culture. Potential Driver #1: Instinct of Self Preservation—Employees pressured for results not likely to open up. Potential Driver #2: Management Pride—Feedback contrary to management’s view not likely to be received with open arms. Potential Driver #3: Avoiding Being the Bearer of Bad News— Bad news related to customers, suppliers, and third parties not likely to be escalated. Reduced cultural health Company struggling financially
  28. 28. 28 From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN KEY TAKEAWAYS The Importance of Culture for Risk Management and Business Success 1. To minimize the limitations of current risk management, compliance and ethics officers should work to identify and understand the employee behaviors and perceptions that actually impact and improve compliance risk detection, the flow of information, and business decision making. Using Cultural Indicators to Improve Compliance Risk Management 2. Compliance and ethics officers that create high-integrity cultures decrease the most significant forms of business misconduct by 67%. In particular, Compliance and ethics officers should directly target specific employee perceptions, such as employee comfort speaking-up, that have a dramatic impact on both the instances of business misconduct but also the likelihood that it is reported. 3. Even relatively minor changes in employee perceptions of corporate culture may have a dramatic impact on overall levels of business misconduct. Each new employee that is disaffected influences employees in the immediate vicinity, putting further downward pressure on corporate perception. 4. By testing core cultural measures and integrating them as critical components of risk management, compliance and ethics officers can improve risk management accuracy while better diagnosing the root causes of systemic compliance failures at the granular, business unit level. Exploring the Links Between Business Performance and Culture 5. Significant correlations exist between specific components of corporate culture and business misconduct. For example, companies with a higher culture of integrity have 10-year total shareholder returns that are 16 percentage points higher than companies with low integrity scores. 6. Employee comfort speaking-up is the cultural component most highly correlated with increased total shareholder return. For every 0.2 point increase in the comfort speaking up score, companies tend to see a five-percentage-point increase in 10- year total shareholder return. 7. While it is likely that business performance and corporate culture both, to some degree, drive the other, it seems clear that cultures where employees freely speak-up to honest, respectful senior leaders improve employee productivity, increase the flow of new ideas, and better avoid risk management pitfalls.
  29. 29. 29 From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN J. Christopher Couch, Esq. 571-303-5406 ccouch@executiveboard.com Chris Couch is a Senior Director with the Corporate Integrity Practice of the Corporate Executive Board and works as an Executive Advisor with the Compliance and Ethics Leadership Council and the General Counsel Roundtable focusing on executive education and legal and compliance team best practices. He brings the Board’s management research to General Counsel, Chief Compliance Officers and their teams through meetings, presentations, and working sessions and works with its researchers to ensure that their work is responsive to member needs. Prior to joining CEB, Chris practiced law for 14 years, serving for the last 11 as corporate counsel to a large publicly-traded corporation in a service industry. During that time his multi-disciplinary practice involved the representation of hundreds of clients and included significant time spent on departmental organization and management, litigation management, corporate governance, compliance training, transactional work and proactive legal advice. Mr. Couch began his practice by spending three years as a litigation attorney primarily handling the defense of commercial disputes and medical malpractice matters. Mr. Couch received his Juris Doctorate from the University of Virginia School of Law after graduating cum laude with a Bachelor of Arts from Rhodes College.
  30. 30. 30 From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL of the CORPORATE INTEGRITY PRACTICE www.celc.executiveboard.com © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN THE COMPLIANCE AND ETHICS LEADERSHIP COUNCIL The Compliance & Ethics Leadership Council is a membership organization comprised of more than 400 of the world’s leading companies, serving 200,000 legal and compliance professionals. Compliance & Ethics Leadership Council delivers unbiased guidance and proven tactics that enable legal and compliance executives to improve individual, functional, and corporate performance. The Compliance & Ethics Leadership Council is a Corporate Executive Board (CEB) program within the Corporate Integrity Practice. The Compliance and Ethics Leadership Council offers key products and services including: ■ Original Research and Insights ■ Proven Best Practices ■ Peer Benchmarking ■ Decision and Diagnostic Tools ■ Live and Online Learning ■ Executive Networking ■ Advisory Support For additional information, please visit the Council’s website at http://www.celc.executiveboard.com.
  31. 31. CORPORATE INTEGRITY PRACTICE COMPLIANCE AND ETHICS LEADERSHIP COUNCIL © 2011 The Corporate Executive Board Company. All Rights Reserved. CELC1008511SYN

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