Compliance : Foreign Corrupt Practices Act : Ethics :
Uncovering High-Yield Investments in Ethics & Compliance
According to LRN's, 2014 Ethics & Compliance Program Effectiveness Report, 65% of companies have seen higher or much higher levels of overall compliance over the past three years, with significant positive impact on business and compliance-related outcomes such as employee engagement, middle management support, and values-based decision making. Despite the overall increase, the impact specific ethics and compliance programs have varied considerably, illustrated by the wide variance in the degree to which they have made progress addressing the key hallmarks of effective programs as identified by the Securities Exchange Commission and Department of Justice in their 2012, Joint Guidance on FCPA enforcement. Fewer than half of all programs have made substantial progress on four of the ten hallmarks, for example.
LRN, which marks its 20th anniversary this year, has developed a ground breaking, comprehensive report that explores the structure and activities of more than 180 companies' global ethics & compliance programs and the impact their investments have had on program effectiveness.
The 2014 study re-introduces LRN's Program Effectiveness Index (PEI), which reveals the factors most commonly associated with an effective ethics & compliance program. The index defines 'effective' programs as those that support the achievement of business goals, improve ethical behavior, and provide education and communication that impact employee decision-making. Companies are ranked on a scale of 0 to 1, based on their ethics and compliance program effectiveness. Comparing how and why programs at either end of the spectrum are run, as well as the average index scores of programs sharing various characteristics, enables ethics and compliance professionals to target high-yield, high-impact investments in ethics and compliance activities.
LRN reports a direct connection between companies that focus on culture and those that have highly effective ethics & compliance programs. Companies with programs at the higher end of the scale prioritize risk mitigation and leadership development, in addition to culture, values and innovation. Companies which place more emphasis on cost reduction and cash management scored lower.
"Although it's extremely important that ethics and compliance leaders work to meet and exceed both regulatory expectations and the demands of program stakeholders, companies must carefully examine the outcomes of their programs," said Wayne Brody, a senior advisor at LRN. "Our study shows that an investment in culture, where values, risk management and innovation are front and center, have significant and lasting economic impact on performance."
Reporting Structure, Tone in the Middle & Celebration Matter Most
A common industry debate focuses on the most appropriate reporting structure for ethics & compliance officers. The study found that programs led by an individual reporting to either the CEO (22 percent) or the board and/or one of its committees (16 percent) have average PEI scores of 0.63; substantially exceeding the mean score (0.60) and outperforming those reporting to the general counsel, with average PEI scores of 0.58. Even specific CEO behaviors are associated with varying degrees of impact, with the most effective including CEOs being the first to complete required E&C training, and CEOs regularly communicating with ethics & compliance officers on issues such as management performance and promotions.
The LRN report also found that while a supportive tone at the top of an organization can be directly linked to the success of an ethics & compliance program, the tone at the middle often carries more weight. While organizations with solid tones at both the top and the middle have average PEI scores of 0.63, the large number (34%) of ethics & compliance programs with solid tone at the top but without support from middle management have index scores of only 0.56. Even more telling, those programs which are not expressly focused on middle management fare worse on the scale, with an average PEI score of 0.49.
Among the surprising findings of last year's (2013) first PEI analysis was the significant impact celebrating ethical conduct has on program effectiveness. This year's data again highlights the critical importance of visible commitment in building ethics and compliance into the fabric of the organization. In 2014, those in the top quintile who frequently celebrate ethical conduct do so in the form of awards (55 percent); recognition in team meetings (45 percent); recognition in company communications (42 percent); and job promotions (23 percent).
Greater Variety and More Frequent Use of Goals, Tools and Metrics Drive Impact
Highly effective programs not only measure and assess both their programs and risks more frequently, but also use more inputs in both processes. They are more than three times more likely than less effective programs to have made at least substantial progress on the "periodic testing and continuous improvement" hallmark. For example, while fewer than one in three program leaders consider financial performance pressure as an E&C risk factor, those who do have impressive average PEI scores of 0.65. The limited group who also consider customer feedback average scores of 0.66 on the PEI.
Metrics are also extremely important in measuring the effectiveness of employee education and other program elements. While most every program measures completion rates, programs which take into account employee feedback (average PEI 0.62) and those that capture the ratio between requests for advice and allegations of misconduct on their hot line calls (average PEI 0.63) fall higher on the scale of overall program effectiveness.
"The most effective ethics and compliance programs don't 'do' ethics and compliance. They enable and assist their businesses to do so, based on a core set of values," added Wayne Brody. "We find that those who run highly effective programs are two or three times more likely than others to measure their programs based on metrics tied to principles of validity, impact, practicality and value."
Since 1994, LRN has helped over 20 million people at more than 700 companies, worldwide, simultaneously navigate complex legal and regulatory environments and foster ethical cultures. LRN's combination of practical tools, education and strategic advice helps companies translate their values into concrete corporate practices and leadership behaviors that create sustainable competitive advantage. In partnership with LRN, companies need not choose between living principles and maximizing profits, or between enhancing reputation and growing revenue: all are a product of principled performance. As a global company, LRN works with organizations in more than 100 countries, and has offices in major cities around the world including New York, Los Angeles, London, Mumbai and Paris.