Measuring Compliance Program effectiveness

As the headlines show, having the components of an ethics and compliance (E&C) program in place, such as a hotline, code, training or policies, doesn’t guarantee effectiveness. The central lesson that we have learned—from our ongoing research and our experience with hundreds of organizations over the decades—is that a values-based approach to governance, culture, and leadership correlates strongly with greater business outcomes and reduced risk. These organizations produce better financial results, boast greater innovation, stronger customer satisfaction, higher levels of employee engagement and, critically, reduced levels of misconduct as well as a willingness to report wrongdoing when observed. Moreover, our research consistently shows that these organizations are significantly more successful at integrating ethics and compliance into their day-to-day operations.

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LRN's research demonstrates conclusively that "operationalizing" E&C in all aspects of the business enables leaders and employees to think and act based on shared values rather than on short-term expediency or minimum legal requirements. It follows, then, that evaluation of E&C programs should be based on how they impact their organizations' operations and workplace behavior— not whether they satisfy a checklist of criteria.

 

Consistent with this perspective, LRN introduced the Program Effectiveness Index (PEI) in 2016 to evaluate the impact that corporate compliance programs actually have on workplace behavior, rather than simply inventorying the components of those programs.

 

HOW TO QUANTIFY PROGRAM EFFECTIVENESS

 

LRN's Program Effectiveness Index (PEI) is a proprietary framework for analyzing the impact of E&C programs. Notable for its unconventional approach to program effectiveness, the PEI measures outcomes across three areas of critical workplace behavior:

  • Ethical decision-making — are the choices employees make animated by values or expediency?
  • Organizational Justice — are senior executives and high performers held to the same standards of conduct as other employees?
  • Freedom of expression — do employees speak up, contribute willingly, and exchange ideas freely?

 

5 MEASURABLE FACTORS OF EFFECTIVE COMPLIANCE PROGRAMS

 

The central challenge for E&C professionals and their organizations is how to operationalize ethics and elevate workplace behavior. Framing the challenge in this way is consistent with the approach taken by the Department of Justice’s guidance on corporate compliance program effectiveness—that is, to emphasize results over program content.

EFFECTIVE PROGRAMS GO BEYOND MEETING MINIMUM REGULATORY REQUIREMENTS TO EMPHASIZE ETHICAL BEHAVIOR

E&C programs driven principally by a desire to solely meet regulatory requirements can have unintended negative consequences. In particular, the elaborate rules necessary to maintain compliance often have the effect of sending employees hunting for exceptions or ways to bypass the very processes designed to uphold those rules. Codes of conduct and policies that align values-based behaviors with an organization's business goals and training that emphasizes ethical decision-making can inspire positive behaviors instead of checking boxes on regulatory requirements.

EFFECTIVE PROGRAMS DIRECTLY INFORM BUSINESS DECISIONS

High-impact E&C programs have created procedures, policies, and training that more effectively promote ethical behavior among their employees and leaders while fostering better decision-making for the business. This emphasis helps make E&C training programs part of doing business rather than an annual obligation. We’re seeing some encouraging signs of impact: organizations are increasingly modifying or abandoning business initiatives because of ethical considerations.

EFFECTIVE PROGRAMS RECEIVE SIGNIFICANT SUPPORT FROM THEIR ORGANIZATIONS AND STAKEHOLDERS

According to LRN research, when CEOs do not consistently behave as moral leaders, 89% of the managers under them fail to lead with moral authority. Further, respondents surrounded by managers who fail to lead with moral authority are 42 times more likely to believe that individuals will be ignored if they take a stand for doing the right thing, and 34 times more likely to believe that they will be punished for doing so.

 

It is incumbent on boards of directors as well as executives to deal effectively with ethical lapses, particularly those that occur at the C-suite level. High-impact E&C programs have engaged boards that employ a multitude of initiatives to reinforce and support the program. In addition, E&C leaders should not be the sole owners of ethics and compliance - when all leaders take responsibility, it elevates the ability of the program to operationalize key initiatives.

EFFECTIVE PROGRAMS OUTSCORED OTHER RESPONDENTS BY A WIDE MARGIN IN TAKING CONCRETE STEPS TO FOSTER ETHICAL BEHAVIOR

Recognizing that actions speak louder than words, effective programs do a better job of encouraging and rewarding good behavior, and also penalizing misconduct.

 

For example, in organizations with effective programs, ethical behavior is an increasingly significant factor in performance reviews and bonus compensation. Our most recent Ethics & Compliance Program Effectiveness report shows that the number of organizations for whom ethical behavior is a determinant in performance reviews and bonus allocations nearly doubled and tripled, respectively, over three years.

EFFECTIVE PROGRAMS TAKE A PROACTIVE AND COMPREHENSIVE APPROACH TO MANAGING RISK

When developing training for employees, successful programs thoroughly understand their specific risks in their industry, geographic concerns, spending authority, incentives and quotas. Develop training programs around these risks allow you to proactively build a program that is adaptive instead of being one-size-fits-all.

 

Operationalizing compliance around these risks can address existing challenges and get ahead of future ones. Static programs that rely on layers of inflexible rules may not be capable of meeting the needs of employees when they are faced with the new risks of an evolving business landscape—risks that can disrupt or threaten an organization's operations. That explains why high-impact programs update their risk analyses more frequently than lower-impact ones.

 

Their audit programs, too, address broad compliance risks, not just financial controls — high-impact programs are 2.5 times more likely to do so than low-impact programs. We see this reflected as well in mergers and acquisitions (M&A), with more M&As than ever now including analysis of compliance risk in their pre-deal due diligence and ethics and compliance having a seat at the table.

DOES AN EFFECTIVE E&C PROGRAM HURT PROFIT MARGINS?

 

One common obstacle that E&C officers face in implementing an effective program is the perceived trade-off between ethical business practices and profitability.

 

The State of Moral Leadership in Business 2019 demonstrates the risks and potential costs for organizations that lack moral leadership. Formal leaders that don’t demonstrate moral leadership practices are responsible for 70% of observed abuses of power, are 10 times more likely to treat people unfairly, and five times more likely to prioritize short-term results over the long-term mission. Furthermore, 82% of survey respondents believe their organizations expose themselves to risk when they fail to consider the ethical or moral implications of what they do.

 

Not surprisingly, managers and executives who lead with moral authority, rather than relying solely on the formal authority of their roles, foster more ethical workplaces. This research tracks with our prior findings. We have seen that substantial benefits accrue to organizations that cultivate values-based cultures. Specifically, our research indicated that 97% of values-based entities display better performance than their competitors. This compares to 80% and 30%, respectively, for more traditional command-and-control or rules-based organizations.

 

Overall, managers and executives who practice values-based, moral leadership are those best positioned not only to help protect their organization's reputation but to propel its growth as well.

LRN's GUIDE TO EFFECTIVE CODES OF CONDUCT

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BIGGEST E&C CHALLENGES FOR EFFECTIVENESS

 

LRN's survey of nearly 500 ethics, compliance, and legal experts and practitioners around the world sheds light not only on the most effective E&C programs today, but also on the general state of the field's efforts to ensure ethical business practices and behaviors. Our findings suggest that many organizations still have not fully committed to the steps necessary for true organizational change.

THERE IS TOO LITTLE FOCUS ON SHAPING EMPLOYEE BEHAVIOR—AND TOO MUCH FOCUS ON RULES AND PROHIBITIONS.

Although research conclusively shows that a values-based approach to ethics increases compliance and improves business results, more than half of E&C leaders say their organizational efforts continue to focus principally on rules and regulations—on telling employees what not to do rather than inspiring them to behave ethically according to shared values.

FAR TOO FEW EXECUTIVES AND BOARD MEMBERS ARE ACTIVELY INVESTED IN ACTIVELY PROMOTING ETHICAL BEHAVIOR IN THEIR ORGANIZATIONS.

Fewer than half (49%) of E&C professionals say their senior leaders take responsibility for or action against compliance failures. Worse still, only 38% say their leaders support appropriate sanctions or penalties for senior executives and high performers involved in misconduct.

MOST ORGANIZATIONS FAIL TO UTILIZE ALL AVAILABLE TOOLS TO IDENTIFY AND REMEDY ACTUAL OR POTENTIAL MISCONDUCT.

Less than one-fifth (19%) of E&C decision-makers say their organization uses data to analyze patterns of misconduct or identify red flags proactively. And barely one-fifth (22%) say their organization communicates lessons learned and remediation measures taken to employees after many forms of misconduct occur.

THE PATH FORWARD

 

Building on LRN's previous work, the Ethics & Compliance Program Effectiveness Report provides definitive support for a values-based approach to E&C programs. The differences between high-impact and low-impact programs identified by the most recent results remain as significant and numerous as ever.

In short, effective programs are more likely to: 

  • Emphasize ethical behavior in addition to regulatory requirements
  • Ensure that ethical considerations permeate all business decisions
  • Embed E&C values in their governance processes
  • Utilize a multitude of tools to identify, remedy, and prevent misconduct
  • Engage all stakeholders in supporting and reinforcing ethics and compliance, rather than relying solely on lawyers and E&C staff
  • Reward ethical behavior and punish misconduct at all levels of organization
  • Take a proactive and comprehensive approach to managing ris

These attributes can certainly serve as a roadmap for development of more effective E&C programs. As this Ethics & Compliance Program Effectiveness Report makes clear, organizations that already follow a values-based approach are substantially better at operationalizing E&C in a manner that is consistent with the April 2019 DOJ guidance. Moreover, embedding E&C programs into organizational operations broadens the programs' impact and makes it easier for employees to comply. Focusing on accessibility, simplicity, and easy-to-use processes is long overdue in the E&C area.

 

For those committed to making the investment in values the path is clear. Step one is shifting the focus of rules-based programs toward impacting employee behavior using values. Then begins the necessary process of building frameworks that operationalize those values throughout the organization, using the E&C program as a catalyst. LRN's Advisory Services practice has substantial experience in this process and has developed qualitative and quantitative tools to assist those who want to undertake it. Using our platform of E&C education solutions, code of conduct reinvention, program evaluations, and policy simplification strategies that embody the best practices identified here, we can help your organization improve culture, behavior, and ultimately, business outcomes.

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