Corporate Misconduct is Always a Reflection of the Board

Boards of directors set the ultimate tone at the very top. What they say, what they do, and where they spend time cascade from the C-Suite all the way through the grassroots of their companies. One of the critical roles of boards is to oversee ethics and compliance, and the systems that are meant to drive companies to do the right thing.

The “2020 Ethics & Compliance Program Effectiveness Report: Confronting the Root Causes of Misconduct” from LRN highlights the decisive role boards play in whether ethics and compliance initiatives simply check the box, or have genuine impact in helping companies and their people do the right thing.

The report separates the effective from the ineffective by measuring companies based on whether values actually guide decisions, whether employees have freedom to speak out and contribute ideas, and whether there is a single standard of organizational justice for all, or a double standard that protects senior executives and high performers who commit misconduct.

Utilizing questions that uncover those behaviors in a survey of 500 ethics, compliance and legal professionals, LRN produces a Program Effectiveness Index, or PEI, that measures the relative strength of a company's E&C efforts.

It’s not at all surprising how the boards in companies rated as strong oversee ethics and compliance. For example:

• They are 57% more likely to hold senior executives accountable for misconduct; and
• They support E&C almost six times more than their counterparts at companies with weaker programs.

The PEI findings dovetail with those in In LRN’s recent report, “What’s the Tone at the Very Top? The Role of Boards in Overseeing Corporate Ethics and Compliance,” which reported a disconnect between directors and their E&C oversight responsibilities. Many chief ethics and compliance officers say boards tend to give E&C short shrift despite the significant business, legal, and reputational risks involved in ignoring it.

To explore the state of current board oversight of ethics, LRN conducted in-depth interviews with 26 present and past CECOs of large companies. We found many boards are woefully unprepared for ethics oversight. Some highlights:

•     About 40% of CECOs reported their boards have metrics in place for measuring E&C effectiveness;
•     40% of CECOs say their boards are willing to hold senior executives accountable for misconduct that happens on their watch;
•     Nearly half say their board hasn't received education and training on their E&C responsibilities; and
•     About 40% say their boards have not done a “deep dive” on compliance failures and scandals, despite recent U.S. Department of Justice regulations requiring them to do so.

The dangerous disconnect between boards and their E&C responsibilities comes right from the mouths of CECOs themselves. Here are some actual quotes from our interviewees:

• “The board is passive, it doesn’t have a plan or strategy for ethics and compliance. It needs one.”
• “The problem is the board doesn’t spend enough time on any ethics and compliance issue. We’re last on the agenda, and often there is not time at all.”
• “We don’t measure ethical culture, but we should.”
• “The board should be asking senior management something–anything–about ethics and compliance. Neither the CEO nor CFO need to report what they have done.”

Together, the two reports underscore it is time for boards to step up more vigorously in their support and oversight of ethics and compliance.

The right board behavior is a linchpin of whether E&C programs flourish or flail, and by extension, whether patterns of corporate misconduct multiply, or wither away.