Compliance professionals have come to appreciate the adage that “tone at the top”—the values espoused and acted upon by the senior management team—is critical in shaping an ethical corporate culture. What's now becoming clearer is that while tone-at-the-top remains important, it alone isn't sufficient to foster ethical behavior by all employees, especially when they're scattered across the globe, spanning countries, cultures, and languages.
Middle managers, including business leaders at the company's remote locations, play a major role in shaping the culture of the organization and influencing the behavior of their direct reports.“It's important for managers to be engaged,” says Mary Snyder, senior director of advisory services at GRC solutions provider SAI Global. “They can be a great funnel in both directions of issues and concerns.” Moreover, large compliance failures often start with a small issue. When managers and employees have a way to ask questions and address challenges, issues can be resolved before they escalate, she adds.
Indeed, talk of values and ethics by senior executives “can be completely destroyed if middle managers say they don't care and will do what they need to in order to make the numbers,” says Ted Banks, principal with Compliance and Competition Consultants. “The process is undermined.”
So along with tone-at-the-top, companies are also focusing on monitoring and influencing the “mood in the middle” and even the “buzz at the bottom.” As Banks notes, “people tend to model the behaviors of the people above them.” Middle managers need to accurately convey the tone and message from top management to their own employees.
Middle management is also the conduit for raising whistleblower concerns from the rank and file. Frontline managers receive more than two-thirds of misconduct allegations, according to a 2012 survey by the Corporate Executive Board. Yet only 55 percent of these managers say they are comfortable addressing employee concerns, the survey found.
Compliance officers can take several steps to boost middle management's ability to effectively convey to their employees the company's commitment to ethical business practices. First up is determining just where the organization is at when it comes to engaging middle management in the process, says Snyder. For instance, has top management laid out clear expectations, perhaps through a code of conduct? Are managers and employees receiving any compliance training—including that coming from other departments? Surveys and focus groups can help in gaining a clearer understanding of just what managers know about ethics and compliance and leading with integrity.
To the extent possible, senior executives, middle managers, and frontline employees all need to physically meet. “It's not enough to just send e-mails,” says Patricia Etzold, advisory partner in the forensics practice at PwC.
While employees generally are fine with day-to-day information coming from their direct managers, “if it's something big; something to do with values or vision, they want it to come from the top executives,” says Elizabeth Cogswell Baskin, chief executive officer with Tribe, an Atlanta-based internal communications company. In Tribe's 2012 survey of frontline and field employees, “Communicating with Non-Desk Employees,” 84 percent of respondents said they wanted more communication directly from senior management.
A consistent strategy to manage communications on compliance and ethics as they move down through the organization is important to ensure that messages don't get garbled as they are passed on, like in a game of telephone. In addition, employees in remote locations sometimes wonder how well management understands the world within which they operate, Baskin says. Personally meeting with and talking to employees at various locations adds credibility to the messages senior and middle managements are trying to convey.
Since it's often difficult for senior executives to get to every location, some companies have created “ethics ambassador” positions, says Cynthia Fornelli, executive director at the Center for Audit Quality. Companies that adopt such a program send future leaders within the company to various locations, often for a period of several months.
Their job? To act as representatives of the executive team, and work with local management to “bring to life the ethics of the company,” Fornelli says. In addition to conveying senior management's views on values and ethics, the ambassadors might conduct ethics training sessions and ensure that any ongoing ethics training is being conducted properly. This enables them to spread the message about ethics and compliance without giving the perception that “we're here from corporate to impose our ideals on you, the foreign subsidiary,” Fornelli says. “This makes it more of a collaboration.”
“[Talk of value and ethics by senior executives] can be completely destroyed if middle managers say they don't care and will do what they need to in order to make the numbers. The process is undermined.”
Compliance and Competition Consultants
By partnering, local management likely will feel more comfortable asking questions of their corporate counterparts and more confident answering the questions they get from their employees, Etzold notes. She adds that local management's willingness to ask questions or even challenge what they're being told can be a positive sign. “It shows they're thinking about the policies,” she says.
“Train the trainer” sessions typically account for part of the work covered between compliance and the local management team. “It's not enough for the compliance officer to say, ‘Go do it,'” Banks notes. Just issuing orders may give some middle managers an excuse to rationalize improper behavior by claiming that no one explained the rules. To avoid that and ensure the message is conveyed properly, compliance needs to provide local management with training materials, presentations, talking points, answers to frequently asked questions, and other guidance.
Joseph Spinelli, managing director and leader in the global investigations and compliance practice at Navigant, identifies some of the issues to cover: If management notices an action that seems questionable, how should they respond? To whom is it reported? How is it investigated? What roles do different departments, such as legal, compliance, and human resources play, and how is their work coordinated?
Working together also gives compliance an opportunity to correct misperceptions or develop solutions to obstacles that could make it difficult for a foreign subsidiary to adhere to corporate policies. William Pollard, partner in the FCPA consulting practice of Deloitte Financial Advisory Services, provides an example: Many companies are implementing travel and entertainment policies in which employees must obtain pre-approval for expenses over a certain amount. Taking this step, however, may not always be practical. A plant manager may be meeting with a customer, for example, who suggests going out to dinner as they wrap up. In most cases, the manager isn't going to say, “No, I need to get pre-approval first,” Pollard notes.
TRENDS AFFECTING MIDDLE MANAGERS
Through a recent survey of more than 1,500 senior executives, CEB identified 10 important trends that fall into three broad, but distinct, categories concerning organization change and which are all impacting middle managers:
Frequent organizational change – Change and ambiguity will derail productivity unless managers help employees better anticipate, contextualize, prioritize, and respond to frequent change at all levels—ultimately making them more agile and accepting of change.
More interdependent work – Collaboration will not occur unless organizations enable and encourage broader employee networks—connecting employees as needed and providing clear direction, aligned incentives, integrated workflow, and better technology.
An increase in knowledge work – Since knowledge work requires both ready access to the right information and effective decision making with that information, organizations need to ensure that employees have the right skills and abilities to use advanced information technology effectively in their jobs.
Relevant and specific trends that can help internal audit understand the importance of the Tone at the Middle include the following:
Middle Managers receive most reports of alleged misconduct – While most companies have set up whistleblower helplines, most employee concerns about observed misconduct never reach this formal reporting channel. A CEB survey indicates that 66% of misconduct allegations are received by frontline managers, yet only 57% of these managers feel comfortable addressing employee concerns.
Middle Managers disproportionately affect employees – Recent CEB analysis confirms that managers strongly affect local culture. Middle managers positively influence integrity levels of local teams, resulting in a stronger control environment. Their behaviour, when aligned with corporate culture, reduces the likelihood of misconduct. It also increases the likelihood of their team members being prepared to debate potential ethical dilemmas and speaking up about observed misconduct. Their demonstration of high ethical standards is also strongly correlated with increased employee discretionary effort.
The Tone at the Top does not always trickle down – CEB research indicates that while employees have slightly improved their perceptions about the Tone at the Top since the financial crisis, they remain much more sceptical about the ethical leadership of their direct managers. It turns out that a strong ethical leadership at the top does not always spread to the middle, and therefore may be an inadequate indicator of a strong control environment. This is intuitively right as most employees see their managers regularly and the top executives very rarely – so their department manager is the real embodiment of corporate values. This is further reinforced by the fact that the Tone at the Top is somewhat unstable, with the average tenure of CEOs being fewer than four years.
In a recent CEB survey, 85 percent of Chief Audit Executives indicate that Tone at the Middle is an important risk area. To provide assurance over this important conduit of an ethical corporate culture, they must evaluate whether middle managers receive effective training on their responsibilities, create the required working environment, are formally measured on their ethical leadership, properly respond to employee concerns and escalate employee reports of alleged misconduct appropriately.
“The corporate folks can work with the business unit, asking, ‘What is it we're trying to accomplish' with the policy?” Pollard says. In this case, it's visibility into the location's spending on customers, as well assurance that the amounts are reasonable.
Helping middle management deliver the compliance message also helps to gain their buy-in. “Instead of seeing compliance as a distraction, it becomes part of the business,” Snyder says.
Using Local Language
Although it may seem like an obvious best practice, ensuring that compliance documents are provided in the local language doesn't always happen. Similarly, the ethics hotline should be in the native tongue and staffed by people who speak the local language, Fornelli says. “It's obvious, but not necessarily deployed everywhere.”
In making translations, it's important to keep in mind that subtle differences in interpretation can have a large effect. For instance, while most compliance professionals in the United States tend to think of the term “government official” as covering all levels of government, that's not the case around the globe, Etzold says. Managers and employees in some countries may apply the term “government official” only to those at the national level. “Not everything is black and white,” she adds.
To further emphasize the company's focus on ethics and compliance, it helps to recognize individuals in middle management and the front lines for actions that helped the company avoid or limit its exposure to bribery or corruption, Fornelli says. For instance, one company praised a plant manager who decided not to go with the lowest cost supplier because he was uncomfortable with the supplier's actions, even though he couldn't pinpoint anything definitely illegal or improper. The manager's instincts were borne out several months later, when the supplier in question was found to have acted illegally.
By recognizing the individual who took a stand—potentially a costly one in the short term—the company's leaders highlighted the importance of acting ethically in a way all employees could relate to, Fornelli says. They also demonstrated the trust they place in their management team.
Another way to recognize and encourage ethical behavior is by including compliance goals within managers' and employees' performance appraisals. “Then it's baked into layers of employees within the organization,” Pollard says. For instance, one goal assigned to a middle manager might be to see that everyone in his or her staff completes anti-bribery training.
Tying managers' compensation to compliance initiatives “incentivizes them and accentuates how important it is for managers to monitor the ethical performance of their employees,” Spinelli notes.
To be sure, assistance from corporate isn't always warmly received by managers and employees out in the field. That's often not the case when it comes to helping middle managers work through compliance issues. The vast majority of managers appreciate certain assistance the compliance department can provide, Spinelli adds. “They want to be sure they convey the right message to employees. And they want to protect themselves and their organization.”