Chapter 19
Establish the Appropriate “Tone at the Top”

No matter how many policies and guidelines a corporation issues regarding standards of behavior, the lessons that matter are not expressed in writing. Tone at the top is all about trust. Absent trust, leaders cannot lead. Trust and clarity as to values go hand in hand. Employees, senior and middle management, vendors, professional advisors who work with the company are people. People watch what leaders do, and how they do it. And they talk about it, at the water cooler, on social media, in the bathroom. If leaders do not act in a trustworthy and ethical manner following consistent shared values, it will be noticed, its effect amplified throughout the organization and beyond, and morale and productivity will plummet.

Remember that the corporation is a community of people; people working and often playing together, with common interests and a shared goal of building a successful organization. People everywhere are eager to feel a sense of belonging and want to work for an organization that values them and offers a sense of purpose beyond simply making a profit. They want to work for a company whose values they can see and respect. They want to take pride in what they produce. They want to admire the people with whom they work.

Make values and expected standards of behavior clear. Work with the CEO and management to design and publish operating principles that reflect the company’s values and provide specific expectations for acting in an ethical manner at all times.

Strive for consistency between stated principles and action. When dealing with possible unethical behavior, assume that both the ethical breach and company response to it will be widely known and rapidly spread. Consider congruence with, or departure from the company’s stated values, and how that will reinforce or tear down the fabric of trust.

Lead with your ears. Monitor the corporate buzz and see and hear what employees, customers, vendors, shareholders and other stakeholders are saying about the company’s culture in person and on social media.

Reward principled performance: develop a framework for recognizing and rewarding ethical performance, especially in ambiguous or difficult circumstances. Find examples from high to low in the company and spotlight them.

Manage upward path carefully. Do not promote anyone who has blemishes on their ethics or compliance track record. Examine the matter carefully to avoid later surprises in such difficult areas as sexual impropriety or harassment or use of racially charged language, for example.

Engage with people as a person. Tone at the top demands that the CEO and the board connect with people inside and outside the organization. Leaders must openly communicate their values on an ongoing and transparent basis, using different platforms and distribution systems. People are suspicious of leaders who are closed about their values or standards. Stakeholders assume if you value nothing, you’ll value anything.

Communicate, and communicate again, in words and action. While the behavior of all members of the community has an impact, remember that it is the CEO’s behavior that tells employees what counts, and what’s rewarded and punished. The CEO is the face of the company, the one to whom employees ultimately look for vision, guidance, and leadership. The board has a direct responsibility to see and understand how the CEO’s character and behavior are perceived.

Getting the tone right has enormous impact. It permeates the corporation’s relationships with investors, employees, customers, suppliers, regulators, local communities, and other constituents. Trust is difficult to establish and very easy to lose. Many corporate failures, notorious and unknown, can be linked to CEOs and boards who have neglected to develop a culture based on integrity.

Sometimes, all it takes is a rumor or hint of impropriety or malfeasance, or a social media post “gone viral,” to negatively impact the stock price. Corporate reputations can be destroyed in an instant. There are conversations going on between and among all stakeholders at any given moment. Due to increased transparency and the ever-present smartphone with video, gaps between a leader’s words and actions can “go viral” in a nanosecond, thus undermining efforts to build a consistent message and tone. Where there are actions that cannot be spoken about, or words that cannot be put into action, the moral fiber of the enterprise will be undermined by cynicism.

Translating tone at the top and building the sense of trust in leadership can be enhanced by certain operational practices, including for example:

Recruiting process. Explicitly include screening for people’s character as well as competence. Everyone in the hiring process should understand that character comes first.

Orientation and training. Create constant reinforcement regarding the importance of trustworthy, ethical behavior consistent with the values and purpose of the company. Ensure that further training and mentoring continue to offer and reinforce consistent messages about what’s valued.

Evaluation Metrics. Performance evaluation should measure not only what is done, but how it is done, in accordance not only with ethical standards but in a consistent style that reinforces corporate values and personal trust.

Reporting Mechanism. Whatever the method employed, employees must know where to go if they see something that troubles them. It is not always prudent to report concerns to one’s supervisor, so it may be valuable to create a hotline or a designated person. Such communications must be kept confidential unless the employee is willing to be named.

Employee Departures. People leaving the company must be treated with the same respect accorded to those remaining. It may be valuable to conduct an exit interview to collect insights perhaps not otherwise available.

While the above are not directly the purview of the board, board members will want to know that the tone set at the top is permeating the organization. It may be helpful to ask for periodic reports on activities intended to reinforce trust and ethical behavior. We are not referring to a checklist compilation or a pile of signed codes of conduct, though those may not hurt the effort. We are looking for recognition of key decision areas and opportunities to actively inculcate and demonstrate the ethical values if the company. The insights gained may be valuable in themselves and requesting such report signals that such matters are taken seriously by the board.

Certain areas may require additional attention from the board and senior leaders. These include:

Mergers, Acquisitions, and Divestitures. Additional measures beyond completing transactional details must be addressed in any transaction. CEO, board and leaders throughout the company need to pay particular attention to the people involved. There will be fear, excitement, and uncertainty. Be sure that the plan to bring new people and processes into the organization or to say an appreciative farewell are developed with care and executed seamlessly top to bottom.

Providing Time and Space for People to be People. This will go a long way toward building a successful combined operation. Leaders must focus on the fact that the new employees have choices and do their best to be sure they do not feel plundered or exploited. Appreciate them, which will help to reduce the pain of inevitable road bumps and mitigate potentially unforeseen risks. Be sure they know where to go with concerns.

Decentralized Operations. Companies are increasingly likely not only to have far flung operations but to have a remote or flex time workforce. The board should ensure that the methods of communicating values and encouraging ethical behavior are effective across all employee cultures. This may take extra time and effort, as understanding the context in which employees operate is not simple when they work autonomously or are drawn from a different culture, for example. Command and control approaches may work, but approaches based on listening, respecting, and adapting will pay dividends.

Malcontents. Be sure that such people are not left alone to fester and allow their germs to spread. Identify them, try to understand and if possible address their concerns, and if not possible, remove them, respectfully. Nothing will undercut the desired tone faster than not addressing and dealing with individuals whose actions are contrary to the organization’s beliefs.

Be Mindful of Institutionalization. We have all seen the value statements stuck on the wall, sometimes covered with impromptu employee remarks. Beware of value statements that become stuck and meaningless, which will only underline that they longer apply. Encourage leaders throughout the corporation to keep the expected behavior fresh and vivid by living it. Stories about values in action are often helpful.

Relentless Focus on Ethical Behavior and Discerning the Right Thing to Do

Implicit in setting the tone at the top is the need to oversee the effectiveness of compliance and ethics programs. In order to exercise such oversight, boards need to receive expanded information regarding a company’s ethics and compliance activities in order to adhere to the requirements of SOX requirements, SEC and Department of Justice (DOJ) guidance, and applicable law.

SOX gave the SEC a Congressional directive to ensure that procedures were in place sufficient to “deter and punish organizational criminal misconduct.” A broad range of experts were drafted onto an Advisory Group and spent 18 months examining the effectiveness of various compliance criteria. They recommended that the SEC promulgate a stand-alone guideline to highlight effective ethics and compliance program dictators and to “specify the responsibilities of an organization’s governing authority . . . for compliance.”

An effective ethics and compliance program is defined therefore as one through which an organization exercises “due diligence to prevent and detect criminal conduct” and otherwise promotes “an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” A among the descriptors of an effective program is whether the “governing authority” is knowledgeable about the content and operation of the ethics and compliance program and exercises reasonable oversight of its functioning.

Training as to What Ethical Behavior Means is Important in Our Changing World

The board may delegate such oversight responsibility to a committee, such as the audit committee, though if it does, it must ensure that it is still receiving sufficient information to fulfill its oversight obligations. Importantly, the requirement for board training on their company codes of conduct, high-level risk areas, or other ethics and compliance program components was clearly addressed, and the training requirement applies to directors and high-level personnel, in addition to all other employees. Regardless, some companies still fail to train their board members.

Directors may feel, for example, that they receive sufficient training by virtue of sitting on more than one board, and thus not make it a priority to undergo such specific training. Mandatory training on each company’s code of conduct, as well as on industry-specific risk topics of significance, is mission critical to complete. It both allows directors to be and demonstrates that they are sufficiently familiar with the policies, procedures, and training initiatives to exercise reasonable oversight of those programs. Not only does such training protect the organization in the event of corporate malfeasance, it also protects the individual directors from civil and/or criminal liability.

Ensure Reports on Compliance are Made Directly to the Board Periodically

An additional component of an effective ethics and compliance program is the requirement that a compliance officer report to the board or its designated committee at least annually about the implementation and effectiveness of the program. Since the results of the Advisory Group’s work were compiled into “Organizational Guidelines” issued by the SEC in 2004, many companies now include such reports at each board meeting.

In 2010, the Organizational Guidelines were further clarified to address the desired relationship between the board and the compliance officer. Under the Organizational Guidelines, an organization is deemed to have an effective ethics and compliance program, even if high-level personnel are involved in a criminal offense, so long as the individual with operational responsibility for the program has “direct reporting obligations” to the board of directors or its designated committee.

This change reflects the importance of providing timely information to the board regarding misconduct, potential misconduct, and the operation of the organization’s ethics and compliance program in general. While not requiring changes to existing reporting relationships between the board and the executive level of the organization, the amendment suggests that a formal procedure for the individual with day- to-day operational responsibility for the program to communicate with the board be adopted. In a further step, boards should consider whether they are receiving regular reporting on the operation of the ethics and compliance program from individuals who have the “expressed authority” to communicate with the board should they need to.

In short, compliance practices have developed significantly in a relatively short period of time. Best practices continue to evolve. The level of scrutiny of a board’s oversight, or failure to oversee, a corporation’s ethics and compliance activities has increased dramatically. The challenge for boards, executive officers, and ethics and compliance officers is to view the increased scrutiny not as an added burden but as an additional opportunity to enhance their corporate governance practices and continue to reinforce the desired “tone at the top.”

Read More

“Organizational Sentencing Guidelines: Past, Present and Future”, Grilli, Kathleen Cooper, General Counsel, U.S. Sentencing Commission; 2016 Compliance and Ethics Institute, 2016

“A Business Ethics Perspective on Sarbanes-Oxley and the Organizational Sentencing Guidelines” Hess, David; Law Review, University of Michigan, 2007

“Navigating Global Compliance: Establishing Rules for Taking the High Road in the Borderless Corporation”, Bellerjeau, James T., General Counsel & Secretary, Mettler-Toledo International Inc.; Dillon, Michael A., General Counsel, Sun Microsystems, Inc.; Gnazzo, Patrick, Business Practices & Chief Compliance Officer, CA, Inc.; Rise, Martha, Vice President, Compliance & Business Conduct, Boeing Corporation; Association of Corporate Counsel Annual Meeting, 2006

“Power and Politics in Organizational Life”, Zaleznik, Abraham, Harvard Business Review, May 1970

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