Tone at the Top the Critical and Misunderstood Trickle Down Anti-Corruption Control by Peter Dent, Partner, Deloitte LLP and Gina Campbell, Partner, Deloitte LLP

Tone at the Top The critical and misunderstood trickle down anti-corruption control By Peter Dent, Partner, Deloitte LLP and Gina Campbell, Partner, Deloitte LLP

The authors would like to express their appreciation to Tracy Sangster, Senior Manager, Deloitte LLP and Heidi Bereta, Senior Manager, Deloitte LLP for their hard work and involvement in the development of this chapter, and to all those who read, offered comments, and assisted in the editing, proofreading and design. Without their hard work, this chapter would not have been possible. Table of Contents

1. Introduction ...... 3

2. Accountabilities and behaviours – Setting the tone at the top...... 7 2.1. The board...... 8 2.2. CEO...... 11 2.3. Chief Compliance Officer (“CCO”)...... 13 2.4. Mood in the Middle ...... 15 2.5. Buzz at the Bottom ...... 16

3. Ways that a company can establish and reinforce tone at the top...... 17

4. Summary...... 20 1. Introduction George Orwell’s Animal Farm, Establishing a strong and ethical an allegory for Russian tone at the top is the backbone Totalitarianism, is an example of in creating, maintaining, and how organizational culture can reinforcing a strong compliance be negatively impacted by those program including internal in positions of leadership. In controls, communications, Orwell’s Animal Farm the training and monitoring. It is the seventh “commandment,” which foundation on which the culture the pigs, with control, modify of an enterprise is built. “The from “All animals are equal” to tone at the top is the ethical environment fostered by organizational leadership and “All Animals Are the single most important factor Equal / But Some Are in determining the organization’s More Equal Than resistance to bribery and 3 Others” corruption.” The concept of tone at the top is not easily is an important concept to tangible and, therefore, consider when establishing and implementing actions and evaluating the tone at the top expected behaviours in a for anti-corruption, fraud and meaningful way and objectively ethics in general1. “Tone at the assessing their success is top is best described as the something with which many consistency among statements, companies struggle. Failure to assertions and explanations of prevent or detect issues is often the management and its not because the programs or actions.”2 In other words, setting controls themselves are lacking an inconsistent tone where but because rules are ignored. those in senior positions are This is a failure of culture where “more equal” than those they senior leaders are not setting a supervise is detrimental to an strong or consistent “tone at the ethical culture. Ethics cannot be top” about acceptable and situational and must be both unacceptable behaviours, just consistently applied and broadly like Orwell’s pigs in Animal uniform. Farm.

1 Corruption is one of the three categories of occupational frauds according to the Association of Certified Fraud Examiners. Due to this categorization as a type of fraud there are instances where only fraud is referred to within the narrative however the concepts discussed still apply to the matter of corruption within the context of tone at the top and compliance programs. 2 Determinants and Consequences of “Tone at the Top”; Staicu, Anca Monica, Ralcuca Iulia Tatomir, Aurora Costina Linca; International Journal of Advances in Management and Economics; Vol.2 Mar. – April 2013; page 76. 3 Auditing Anti-bribery and Anti-corruption Programs – June 2014: The Institute of Internal Auditors.

Private & Confidential | Draft 3 Rarely do companies or fraudulent or corrupt behaviour. management realize or admit However, programs and controls that they have a poor tone at will have minimal, if any, effect the top prior to large scale fraud. on the ability to defeat the The Treadway Commission’s rationalization that accompanies report in October 1987 stated, perpetrators of fraud or “The tone set by top corruption without a strong tone management – the corporate at the top to bolster one’s own environment or culture within internal restraint. which financial reporting occurs The fraud triangle consists of – is the most important factor three elements that are generally contributing to the integrity of present when fraud occurs the financial reporting process. Notwithstanding an impressive set of written rules and procedures, if the tone set by management is lax, fraudulent financial reporting is more likely to occur.”4 The infrastructure to prevent financial crime may be sound, but its effectiveness still depends on execution, on individuals doing the right thing at the right time – culture is what enables and drives those appropriate behaviours. This was emphasized in The Sarbanes-Oxley Act of 2002, after a series of major corporate accounting scandals occurred; it prioritized tone at the top as an important element in the prevention and detection of fraud, corruption and other unethical financial practices

A robust compliance program is designed to be effective at mitigating the three elements of the fraud triangle – opportunity, pressure and rationalization – factors which together can lead to an individual engaging in

4 Committee of Sponsoring Organizations of the Treadway Commission (COSO); Report of the National Commission on Fraudulent Financial Reporting; October 1987.

Private & Confidential | Draft 4 Many boards miss the lesson one As mentioned earlier, companies can take from Orwell’s pigs. As or management often do not mentioned above, Animal Farm’s realize or admit that they have a seventh commandment speaks poor tone at the top5 prior to a to the integral role that large scale fraud being identified consistency plays in either and this can lead to negative creating or destroying an ethical consequences for the company culture. Environments where when attempting to resolve such everyone is equally accountable matters. According to the 2014 reinforce the expectation of Report to the Nations the fourth ethical behaviour, but where largest contributing factor to some are treated “more equal” frauds was poor tone at the top ethical foundations are and in the 2012 Report to the undermined. Differential Nations, was the primary factor treatment in the face of similar in 18% of cases cited for those inappropriate behaviour creates frauds that resulted in a loss of conditions ripe for $1 million or more6. The SEC rationalization. Without the noted in the Siemens Foreign ability to rationalize their Corrupt Practices Act (“FCPA”) behaviour ethical people remain case that the misconduct and ethical as the vast majority of us those involved “reveals a are wired to avoid conditions of corporate culture that had long cognitive dissonance. In other been at odds with the FCPA” words, perpetrators of fraud or and a corporate culture in which corruption need to be able to “bribery was tolerated and even justify their dishonest actions so rewarded at the highest levels”7 . they reduce negative feelings for This is just one example of a doing something they know is corruption case which led to against the rules. It is common penalties because of a failure in to hear such rationalizations as; tone at the top. Similarly, the “I wasn’t doing anything that Kellogg Brown & Root LLC others weren’t doing,”, “I was (“KBR”) plea agreement, the US doing it to benefit the Department of Justice (“DOJ”) company”, “There was nothing noted that “tolerance of the in it for me”, “No one got hurt,” offense by substantial authority or “I was just getting my share.” personnel was pervasive All of these are variations of a throughout the organization” as theme exhibited during some of part of the culpability score for the largest white-collar fraud determining the applicable fine and corruption cases such as Enron.

5 Report to the Nations on Occupational Fraud and Abuse – 2014 Global Fraud Study – ACFE; page 39. 6 Report to the Nations on Occupational Fraud and Abuse – 2012 Global Fraud Study – ACFE; page 38. 7 United States District Court for the District of Columbia, Case: 1-08-cv-02167; U.S. Securities and Exchange Commission v. Siemens Aktiengesellschaft; Complaint; December 12, 2008.

Private & Confidential | Draft 5 range8. Both Siemens and KBR officers, these actions allowed are two of the largest penalties the company to effectively deal enforced under the FCPA to with the situation and obtain a date. more favourable result.

However, purposeful attention Tone at the top can drive value – to establishing and reinforcing a not just positively but also strong tone at the top can negatively10. In a negative sense, potentially lead to more a company may take a laissez favourable results for the faire approach or set a negative company if faced with dealing tone at the top, whether with such matters as a purposeful or not. An example corruption investigation. In the being where so long as the recent case of PetroTiger, while organization is making profits, three former officers of management turns a blind eye to PetroTiger pled guilty to violating the actions of their employees. the FCPA, the DOJ declined to This mentality can promote prosecute PetroTiger itself. One negative value in the eyes of of the reasons, as put forward by stakeholders or lead to other Timothy Treanor, partner at consequences such as penalties Sidley Austin LLP and lead should such discretions be outside counsel for PetroTiger, uncovered, both of which can “The board was very aggressive harm a company’s reputation in demanding disclosures and in and market value. Profits can trying to institute reforms to put hide an enormous number of in place a code of conduct … sins so it is just as important to we were able to establish a understand the underlying struggle that showed that the reasons for profits as it is for board members were not losses. turning a blind eye to misconduct. They were not In order to set the tone at the interested in profiting from top Orwell’s pigs maintained corruption. They, in fact, were control by creating and very aggressively trying to preserving their roles on the establish an environment of farm. Each pig had a very integrity"9. While the strong important role to play in order to actions undertaken by the keep up the “culture” that they PetroTiger board to establish the were trying to cultivate. tone at the top did not prevent Accountabilities and behaviours the wrong doing from are also important for setting an happening by the former ethical tone at the top in any organization. In addition, the

8 United States District Court – Southern District of Texas – Houston Division, Criminal No. H-09-071; United States of America v. Kellogg Brown & Root LLC; Plea Agreement; Received February 11, 2009. 9 The Overlooked Lessons of PetroTiger Trial; Tom Fox; Compliance Week; July 14, 2015. 10 10 Ways to Measure The Tone At The Top; Corporate Compliance Insights; June 4, 2012

Private & Confidential | Draft 6 individuals assigned these effective compliance and ethics responsibilities need to be given program as outlined in the the appropriate tools, and be guidelines may receive lower held accountable. penalties or the opportunity for a deferred or non-prosecution 2. Accountabilities and agreement. We therefore often behaviours – Setting utilize the sentencing guidelines the tone at the top as a way of measuring a company’s compliance and ethics programs by ensuring they “Culture eats strategy have incorporated elements that for breakfast” the DOJ views as part of an effective compliance and ethics – Peter Drucker program. The 2004 amendments All individuals in an organization to the United States Sentencing and those charged with Guidelines provide some governance must be setting an guidance into the roles and ethical tone that matches the responsibilities that each culture envisioned or the individual in the organization has corporate strategies will be for setting the tone. It states that undermined. Tangible steps to “an organization shall promote create an ethical culture must be an organizational culture that considered when developing the encourages ethical conduct and foundation of the company’s a commitment to compliance strategy. By aligning cand with the law.”11 Section 8B2.1 of embedding the ethical culture the guidelines provides further with corporate strategies, ethical guidance on promoting a culture behaviours will have an easier that encourages ethical conduct time enduring in setting the at all levels of the organization organizational culture. including the following: Otherwise, regardless of a • The governing authority company’s strategy, culture will should exercise reasonable dictate the direction of the oversight over the company if they are not implementation and cohesively joined. effectiveness of the The DOJ utilizes the United compliance and ethics States Sentencing Guidelines to program. assess and calculate any • High-level personnel shall penalties for those companies ensure that the organization that have been found to violate has an effective compliance the FCPA. Companies that show and ethics program and at they exhibited some or all of the least one individual will be identified elements of an

11 United States Sentencing Commission Guidelines Manual; November 1, 2014; page 511; Section 8B2.1.

Private & Confidential | Draft 7 assigned overall DOJ’s Criminal Division stated in responsibility. an interview “Management should make sure that everyone • Day-to-day responsibility for understands that the company is the program will be assigned serious about compliance. And to specific individuals who will it’s very important to put report to the high-level resources into the compliance personnel and the governing program and to empower it authority. within the company. Those two • The program will be things often are not given promoted and enforced enough priority.”13 Having a through appropriate board which focuses efforts on incentives and disciplinary compliance and giving the CEO measures. and CCO the mandate and resources to focus on In addition the UK Bribery Act’s compliance will give Six Principles of Adequate organizations a boost in Procedures states “The top-level establishing a strong tone at the management of a commercial top. organization (be it a board of directors, the owners or any 2.1. The board other equivalent body or person) are committed to preventing bribery by persons associated “If companies aren’t with it. They foster a culture managing culture, within the organization in which culture is managing bribery is never acceptable.”12 them”14 The board, CEO, and CCO play critical roles in establishing the Increasingly boards are tone at the top. The process of recognizing culture as an establishing the tone at the top effective framework to allow entails addressing such questions them to address compliance, 15 as “What role should the board ethics and integrity risks . No play? What actions should CEOs single decision drives tone at the take to establish the tone at the top more than the selection of top? What role can the CCO play the CEO. That process must in helping cascade the tone at necessarily focus on the top to the middle and competence, character, and beyond?” Leslie R. Caldwell, chemistry and raises questions assistant attorney general for the such as the following:

12 The Bribery Act 2010 – Guidance; Ministry of Justice; page 23. 13 “Didn’t comply? Then fully cooperate”; Fraud Magazine; Carozza, Dick; May/June 2015. 14 Risk and Compliance Journal – Deloitte risk and Compliance – Wall Street Journal – How Boards Can Raise the Bar on Ethics and Compliance; October 23, 2014. 15 Ibid.

Private & Confidential | Draft 8 • Does the prospective CEO There are various methods an have the requisite skills and organization can employ to experience to move the understand whether the “mood organization forward? in the middle” and the “buzz at the bottom” are consistent with • Does this person possess the the “tone at the top”. The character and moral fiber to following are examples of ways model and contribute to the in which the board can gain an development of a values- understanding: centered enterprise and strategy?

• Does the CEO have the chemistry and communication skills necessary to rally others to successfully and consistently deliver on the organization’s value proposition to all stakeholders The governing authority must ensure that ethical objectives are built into the actions and strategy of the organization, and that they are not merely a statement of good intentions. All personnel in the organization are treated equally.

Private & Confidential | Draft 9 a. Board questions The role of the board is Therefore it is important that imperative in influencing the board members not only have culture and tone of the a process for oversight of organization. According to the corruption risks but also Deloitte 2014 become involved in obtaining Reputation@Risk survey, a a periodic view into the global risk survey of more than organizations culture through 300 business executives, 87% hands-on observations and of executives rated reputation working with management. risk as more important than Valuable insights can be other strategic risks, with garnered by the board ethics/integrity (fraud, bribery, through simple inquiry, corruption) identified as one of including the following the top three reputation risk questions that boards may drivers of concern (55%). want to ask:

 Does the organization  Does the current ethics support the ethical culture and anti-corruption and anti-corruption compliance program cover compliance program the organization’s global through training and operations, including communication which management, employees, includes allowing shareholders, customers, employees to raise ethics subcontractors, business and corruption compliance partners and vendors? issues without fear of  retaliation? Does the organization have an ethics and  What is the process for compliance officer? assessing ethics and corruption compliance  Does a reporting and risks within the monitoring process keep organization? Have they the board of directors updated their policies, informed of key ethics and procedures and internal corruption compliance controls to address issues, as well as the emerging risks (i.e., cyber actions taken to address risk, anti-corruption)? them? Are ethics and corruption compliance issues a regular item on the board agenda?

Private & Confidential | Draft 10 b. Employee exit interviews quickly through the masses, whether that be employees or An often overlooked but useful the general public. If the pigs in avenue to understand if there Animal Farm had open lines of are any tone at the top communication, they most likely challenges is through employee would have been wise to the exit interviews. In some cases, discontent among the other ethical concerns may be the animals. This concept centers on catalyst behind an employees’ concern by those governing with decision to leave the company the impact of culture on and while not all departing behaviour, and the principles of employees may be vocal with tone at the top enduring. If their concerns, with specifically followed by Orwell’s pigs, then tailored questions, you may have perhaps so too would the the opportunity to understand if idealistic 7 original tenets of organizational culture or specific animalism prevailed. unethical acts were a contributing factor. d. Site visits c. Open lines of Site visits can give the board communication insight into what is happening in the “office”. They will have a The board should have open hands on experience of the lines of communication with organizational culture and hear both top and middle directly from lower level management. While a company employees how programs can be cannot control the actions of improved. every employee, reinforcing a culture of ethics and integrity 2.2. CEO will go a long way in influencing The Organisation for Economic employee actions that will be Co-operation and Development seen in a positive light. Due to (OECD), of which Canada is a social media it is important that signatory, stated in its Good communications and actions Practice Guidance that match as information regarding companies should have: inappropriate actions will travel

Private & Confidential | Draft 11 cows” in the organization that “Strong, explicit and are above the rules. As with the visible support and pigs in Animal Farm the CEO commitment from cannot just talk a big game. senior management to CEOs should use various types of reporting to assess whether the the company’s internal appropriate tone is being controls, ethics and reinforced within the compliance programs or organization including the measures for preventing following: and detecting foreign • Whistleblower hotline bribery”16 statistics - statistics from the whistleblower hotline help The CEO is the face of the assess whether the organization, the figurehead to appropriate tone at the top is whom employees ultimately look being reinforced for vision, guidance, and leadership. Leadership derives • Surveys – results of ethics or from trust, and trust is built upon cultural pulse surveys a common understanding performed help to determine between people.17 Leaders must if there are any indicators or find ways to connect with concerns regarding the people inside and outside the culture and tone at the top. If organization on an ongoing and indicators or concerns exist, transparent basis, using different the CEO can utilize these platforms and distribution results to determine ways that systems. they can improve the tone at the top Both communication and behaviour tells employees what • Open lines of communication counts and what’s rewarded and - appropriate communication punished. A CEO should show practices and open lines of through actions that he or she is communication are important committed (e.g. not accepting to strengthen and assess tone gifts from vendors or seeking at the top. Lines of legal advice on ethical questions) communication should be and accountable for the tone at diverse, including practices the top. The CEO must show that he or she will suffer the same consequences for wrong doing. There are no “sacred

16 OECD; Good Practice Guidance on Internal Controls, Ethics, and Compliance; Adopted February 18, 2010; Annex II page 1. 17 Darcy, K.T. A Companion to Business Ethics, edited by Robert E. Frederick, “Ethics and Corporate Leadership,” Blackwell Publishers Inc., 1999: 405.

Private & Confidential | Draft 12 available to external role of a CCO, whether it is due customers and stakeholders to the size of the organization or as well, in order to allow for a lack of resources, it is essential messaging to be received by for an organization to the appropriate parties in a thoughtfully assign the timely manner responsibilities that a CCO would normally retain to other 2.3. Chief Compliance member(s) of management Officer (“CCO”) within the organization and be The person selected for this role committed to holding these must be someone whose individuals accountable for integrity is clear and who can implementing and sustaining earn the respect of personnel at these activities in the absence of all levels to establish and a CCO. It will be up to the board reinforce the tone at the top. and management to decide if The CCO and their team, play a assigning these roles to members crucial role in creating a “speak of management will achieve the up” culture. In addition, the same effectiveness in the CCO helps convey key ethics and absence of a CCO. compliance messages in both The CCO should report on a internal and external regular basis to the board and communications and assists the other members of senior board in both understanding and management regarding the executing their role in effectiveness of the compliance establishing the tone at the top. program based on measures Compliance programs are found such as the whistleblower to be far more effective when program, employee surveys, and the CCO reports to the board. It findings from investigations shows the importance of the where applicable. The CCO CCO role and the issues at the should also send out regular organization18. At a minimum communications to middle the CCO should have direct management and employees access to the board. It allows stating the importance of a the CCO to undertake their role strong culture of compliance and and responsibilities in a reinforcing the values of the collaborative manner with the company. Tools that a CCO can board’s confidence, the respect utilize to assess and report a of management and enhanced company’s tone include the transparency following: While not all organizations may feel they can support the specific

18 Griffin, Aimee; MakingWaves Blog – The 2014 Ethics & Compliance Program Effectiveness Report: Reporting Structures and Tone at the Top; May 23, 2014.

Private & Confidential | Draft 13 a. Clear code of ethics c. An ear to the ground A good starting point for It is critical for companies to establishing tone at the top is to understand how the issue a code of conduct and an organization is perceived by anti-bribery and anti-corruption employees, customers, and other policy endorsed by the board stakeholders of the organization and included as part of the by “keeping an ear to the organization’s strategy. ground”. Organizations can potentially do Customers / other stakeholders a disservice to themselves by implementing vague policies or It is important to connect with communications that leave room customers outside the for misunderstandings or organization to understand how decisions with potential anti- the culture of the organization is corruption implications (e.g. gift- perceived by outsiders. This can giving, facilitation payments) up be done via various methods, to individual employees where some of which may involve their decision may undermine customer feedback surveys, the intended message of the social media, or the company company, even if inadvertently. hotline. With the prevalence of Management and employees social media, valuable insight must all be held accountable. into a company’s reputation can b. Whistleblower hotline be obtained by reading what individuals are saying about the A whistleblower hotline provides company in online media. another avenue of Regardless of how an communication for all organization chooses to obtain stakeholders, both internal and customer insight, the CCO external. If promoted effectively, should consider what kind of it can provide early insight into customer feedback is being concerns that internal and received or communicated and external stakeholders may have how, if at all, could this be that could be reflective of a poor impacted by the internal culture tone at the top before these of the organization. stakeholders escalate the If customers or other concern beyond the control of stakeholders perceive the the company. organization as lacking integrity Employees with the courage to or communicate significant step forward with ethical criticisms and concerns about concerns must also be the actions and behaviours of appropriately recognized and employees, a positive tone at the rewarded to help encourage top may be lacking or not others to follow suit. effectively translating downwards to those employees

Private & Confidential | Draft 14 in customer-focused roles. Mergers and acquisitions can Organizations should consider if also pose a unique challenge. these perceptions or criticisms Using survey results, the CCO are indicative of the need to take can also compare how various necessary actions to reinforce business units or subsidiaries the ethical culture desired. compare and may help to identify areas of the business Employees where the messaging may not More than just customers and be resonating or communicated other stakeholders, CCOs need as effectively and the CCO can to connect with employees. put in place the appropriate Employee surveys involving procedures. questions around employee 2.4. Mood in the Middle engagement, the perception of culture and management integrity can provide insight into “the one slice of the how tone at the top is actually organization where perceived. Do employees perceive the company values as CCOs fear the biggest merely a statement without gap between culture and intention or do employees feel values: middle that those in management management”19 positions “walk the talk”? An example of a survey tool which There is often the misconception Deloitte has developed is the that tone at the top can be Deloitte Team Assessment which achieved with only the board measures goals, people, and executive management behaviour and leadership and making efforts at stating the benchmarks these factors to ethical values and intended effective teams. corporate culture of the The further away from company. Management and headquarters, the greater the boards tend to under communicate values by a factor likelihood that the ethical 20 message gets lost in translation. of 10 . Middle management Organizations with therefore plays a critical role in internationally located making sure that message is subsidiaries or business units can effectively reinforced with often have a more challenging employees as they are the time establishing tone at the top representatives of the if efforts aren’t made to engage organization that employees deal the subsidiary or business unit. with on a day-to-day basis and are primarily their direct

19 In Focus: Compliance Trends 2014; A collaboration between Deloitte and Compliance Week; May 2014. 20 Risk and Compliance Journal – Deloitte risk and Compliance – Wall Street Journal – How Boards Can Raise the Bar on Ethics and Compliance; October 23, 2014.

Private & Confidential | Draft 15 employees take their cues from pressures to meet performance corporate leaders. Thus, the DOJ expectations, ethical concerns and SEC consider the around other management or commitment of corporate employee actions, or how are leaders to a “culture of they responding to the ethics compliance” and look to see if and compliance initiatives such this high level commitment is as training attendance. also reinforced and implemented It is important for an by middle managers and organization’s culture to create employees at all levels of a open lines of communication, to business.”21 Middle management encourage employees to raise must not only clearly establish concerns without fear of the tone in fraud risk retribution. Not only should management policy documents there be an ability for staff to but they should also reinforce report incidences of fraud and this tone through proper corruption, but staff should also communication to their be held responsible for the employees. Organizations should following: also pay attention to how middle management are acting, not  Understand their role within only at work but also in their the internal control personal lives, as behaviour framework outside of work is generally representative of how they  Read and understand policies behave in the workplace. If and procedures, including middle management is not fraud policy, code of aligned with the board and conduct, whistleblower executive management or not policy as well as other actively living the corporate operational policies such as culture and compliance program procurement manuals, etc. initiatives, the message being  Participate, as required, in received by employees could be the process of creating a drastically different from what strong control environment, was intended. designing and implementing 2.5. Buzz at the Bottom control activities, and participate in monitoring The buzz at the bottom can activities provide important insight into  Have, at least, a basic whether or not an organization understanding of fraud and has established and reinforced corruption and an awareness the ethical culture intended. Consider what employees are of the associated of red flags saying about management

21 FCPA – A Resource Guide to the U.S. Foreign Corrupt Practices Act; Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission; November 14, 2012; Page 57.

Private & Confidential | Draft 16 Organizations should create a management help translate the seamless integration, beginning “tone at the top” to a healthy with orientation followed by “mood in the middle” by continuous training on ethical creating accountability. The behaviours including anti- organization must have “trickle corruption. Comments heard down integrity”. Upper during training can be valuable management must be just as in objectively assessing whether accountable as front line there is room to improve the employees. tone at the top (i.e. are Organizations can establish and employees receiving the reinforce tone at the top by message that is intended?). embedding activities throughout To enforce a culture of anti- their general everyday practices corruption the organization with more tangible actions than needs to enforce a strong tone just training employees. For at the top so that employees example, hiring employees based have the confidence to do the on their character, competence right thing. Empowering and chemistry can make it easier employees by providing them for these employees to buy-in to with knowledge of the culture and help to develop a applicable regulations, policies corporate reputation for and procedures, as well as case integrity; hiring individuals that study examples and involving have a history of wrong-doing them in discussions regarding will not reinforce an ethical tone fraud and anti-corruption risks at the top. Other examples of and mitigating controls will help ways that companies can entrench the culture. Embedding establish and reinforce tone at these activities throughout the the top throughout their general year into the culture of the practices include: organization and not just paying lip service to the activity or 3.1. Walk the talk following a check the box Despite the concept that mentality will reinforce in “culture eats strategy for employees the importance and breakfast”, many organizations commitment to ethical behaviour continually spend a by the organization. disproportionate amount of time 3. Ways that a company developing and improving their strategy, or celebrating financial can establish and successes, often assuming that a reinforce tone at code of conduct or infrequent the top statements about acting ethically will suffice in setting up an Beyond the roles described ethical culture. Organizations above, the board and executive must do more than just

Private & Confidential | Draft 17 communicate the importance of situations go a long way in acting ethically and with demonstrating the values of the integrity; executives and senior organization to both internal and management need to “walk the external stakeholders. talk”, on an ongoing basis, and in their personal lives as well. 3.2. Reward for principled performance Policies and messaging providing clear direction and processes for Recognition and rewards should employees to take when be aligned with desired values encountered with ethical and behaviours. According to situations or situations of risk to the “In Focus: Compliance the organization will assist in Trends Survey 2014”, only 27% establishing the appropriate tone of respondents indicated that of the organization. However compliance is considered in the further to this, organizations measurement of senior must ensure that the messaging managers’ performance and 22 and processes are not discretionary compensation. contradicted by the actions that One of the supporting elements executives and senior to obtaining buy-in to an management undertake when organizations’ ethical values by encountered with these same senior management and getting situations. If employees feel like them to “walk the talk” is by the “rules” only apply to them, establishing goals involving employees may become ethics and compliance into their disengaged or take their own variable compensation plans. liberties when it comes to Incorporating targets involving questionable decisions. anti-corruption or anti-fraud Organizations must ask compliance, for example, will themselves whether or not help to balance to pressure that executives and senior senior management may feel to management are demonstrating meet certain performance the organizational objectives targets. Making the targets expected of employees. realistic and providing a A common challenge companies reasonable balance to variable face, especially in areas where compensation between the two corruption concerns can be sometimes competing objectives, heightened is that legality organizations can reduce the doesn’t always mean ethical. incentive to focus solely on Executives and senior financial performance metrics. management that maintain Otherwise, if financial professionalism and avoid performance metrics are potentially compromising favoured by senior management

22 In Focus: Compliance Trends 2014; A collaboration between Deloitte and Compliance Week; May 2014; page 5.

Private & Confidential | Draft 18 over acting ethically, employees ethics policy will be will have less consideration for diminished.”23 the organizations ethical While the punishment should fit objectives as the tone trickles the crime, organizations should down the line. consider the appropriateness of Organizations should also terminating employees who consider the current and past consistently or severely violate ethical behaviour of employees the rules or fail to abide by the being promoted into senior compliance program (e.g. leadership roles or even general repeated failure to take anti- promotions. If these employees corruption training, failure to exhibit indifference or disregard communicate conflicts of interest for the ethical values of the or enforce conflict of interest company yet receive rewards or rules). Employees that show promotions, other employees complete disregard for the may not feel that focusing on culture of the organization by ethical values is a valued aspect engaging in these consistent or of their performance when it in severe violations can have a fact it is a critical component. detrimental impact on other employees who may start to 3.3. Penalties or mirror their behaviour. punishments Organizations should also encourage vendors to follow the “If you give an inch, company ethics and compliance program, followed-up with they’ll take a mile” consequences if they do not. Failure to hold employees and While organizations should vendors accountable creates a reward principled performance, tone at the top that is at odds there must be consistent with its intent. discipline of ethical violations or individuals whose actions are People talk, whether you want contrary to the organization’s them to or not. Unethical beliefs. “Consistent discipline behaviour and how you respond requires a well-defined set of will likely be widely known sanctions for violations and strict throughout the organization, adherence to the prescribed therefore organizations must disciplinary measures. If one consider what messaging they employee is punished for an act want to send when disciplining, and another employee is not or not disciplining an ethical punished for a similar act, the violation. Will it conflict or align moral force of the company’s with communicated values?

23 Tone at the Top: How Management Can Prevent Fraud in the Workplace; Association of Certified Fraud Examiners

Private & Confidential | Draft 19 4. Summary

“Creating a culture of integrity begins with tone at the top, but it has to include the mood in the middle and the buzz at the bottom. . . As important and essential as compliance is, in the struggle between culture and compliance, culture always wins”24

Tone at the top is one of the most important elements that an organization needs to establish to maintain an ethical culture. An organization must maintain roles and responsibilities that build culture into the strategy. No one in the organization should be treated “more equal” and the board, and upper management should be held accountable to maintain the ethical environment. Tone at the top is a difficult element of an ethics and compliance program to measure - it isn’t tangible. Organizations shouldn’t assume they are doing a passable job; they should assess the factors discussed above and benchmark themselves against their industry peers and others of a similar size. Tone drives behaviour and is imperative to effectively managing organizational risk.

24 Risk and Compliance Journal – Deloitte risk and Compliance – Wall Street Journal – How Boards Can Raise the Bar on Ethics and Compliance; October 23, 2014

Private & Confidential | Draft 20