Setting the Right Tone from the Top

The board of directors, in concert with the CEO and others, set the tone and conduct for corporate behavior throughout the organization, and is the most important element for promoting honesty in a company. In this episode, we’re talking about tone and conduct from the top. Trends Corporate greed at the executive level has destroyed hundreds of companies. Many CEOs over the years have been sued over white collar crimes, and this sends a clear — though perhaps unintentional — message to their employees that committing fraud is acceptable, so long as it makes the company seem acceptable. That’s simply not the case, and is a prime example of setting the wrong tone and conduct from the top. At the same time, there are no regulatory rules or accounting standards that define exactly what the tone and conduct at the top should be. So we need to be mindful. When our companies are doing really well, we might slip into “Perfect Place Syndrome," and all the hard work and effort you put into building a company culture that is mindful of ethical breakdowns could be wiped out in an instant. Gaps The control environment: This is key to setting the right tone and conduct of the organization, because it influences the control consciousness of its people. For example, do you have a Code of Business Conduct and Ethics? A commitment to competence: Don’t take shortcuts, and don’t hire people that don’t fit within your organization. Board of Directors and audit committees: Are they engaged? Do they ask questions and take appropriate action? Management philosophy and operating style: This needs to place a high value on risk assessment and internal control and, more importantly, encourage a “speak up” environment. If people feel like what they’re going to say will fall on deaf ears, they may not speak up at all. Well-defined organizational structure: Do people know what their roles and responsibilities are? How about their reporting channels and the communication protocols? Appropriate assignments and authority and responsibility: Are there well-defined duties that are appropriately segregated to prevent and detect errors or fraud? Human resources: Your recruiting and retention policies and practices should ensure that human capital is valued. Chief Executive: The buck stops with them. They have the ultimate responsibility for the internal control system, and a positive control environment is a big part of maintaining effective internal controls. Challenges It is crucial for company success for executives and management to set an example of ethical behavior on the job, otherwise, they are creating an entire organizational culture of fraud. ABC Theory of Fraud: You have one bad apple, you create a bad bunch, and the next thing you know, you have a bad crop. So what should have been an isolated incident may manifest itself in other parts of your organization. When employees are under pressure to meet unrealistic goals, they’re often faced with a choice of whether or not to do whatever it takes, no matter how improper, to achieve those goals. Solutions Personnel changes are not always warranted. Education and formal training in some cases might accelerate the general adoption of a more ethical corporate culture in an organization. It is really important that senior management position themselves to communicate to employees what is expected of them, lead by example, and provide a safe mechanism for reporting violations and rewarding integrity. Employees need to see management demonstrating a commitment to their ethics principles. The message must be communicated consistently and reinforced with actions. Learn more about your ad choices. Visit megaphone.fm/adchoices