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Home Compliance

Outrageous Compliance, Part 5

by James Bone
May 18, 2016
in Compliance
A culture of ethics is established not by words, but behaviors

This series of articles is an irreverent, tongue-in-cheek look at the serious business of risk management and compliance and the lack of scientific rigor dressed up in charts and graphs, which have an appearance of legitimacy, but tell us little about risks.

First of all, let me say that risk management and compliance are important functions and deserve to be taken as seriously as any other discipline in business and government to ensure efficient operational outcomes. My point in these articles is to point out where many firms diverge from serious risk management into the realm of mystery cloaked as rigor.

Click to read Part 1, Part 2, Part 3 and Part 4.

Victim #5 – Tone at the Top

I have always been curious what people mean when they say that tone at the top is a critical component of corporate culture.  It reminds me of a catchy mantra that is often repeated but no one can agree on what it means.  Tone at the top has become a sound bite in popular media as a litmus test for strong corporate cultures, but how does tone impact culture?

I would wager that every firm or CEO who has experienced a fraudulent episode, financial failure or large regulatory fine had tone at the top – whatever that means.  Not one chief executive would publicly state that he or she does not believe in good financial controls, risk management or ethical behavior.  With that said, what separates exemplary leaders with a long-term track record of strong financial performance and ethical behavior from those who make a big splash as innovators or corporate gurus before leading their organization to ruin?  The answer is not as simple as the sound bite implies.

In December 2015, the Institute of Internal Auditors published a report outlining 17 metrics for measuring tone at the top. While everyone generally agrees that tone at the top plays a role in long-term financial performance, the results clearly point out that management’s actions and/or behavior are not consistent with their words.  Additionally, not everyone will agree there is a direct correlation between the measures used to assess tone at the top as a pathway to ethical behavior, but one thing is clear: management’s behavior and decision-making processes speak much louder than the words on a mission or values statement!  Very few employees remember a mission statement, but many are able to easily recall from memory their sales or bonus goals.  This fact should not be surprising, but it does beg the question: what is the real value of tone at the top?

First, let’s define what tone at the top means. According to Wikipedia, “‘tone at the top’ is a term that originated in the field of accounting and is used to describe an organization’s general ethical climate, as established by its board of directors, audit committee and senior management. Having a tone at the top is believed by business ethics experts to help prevent fraud and other unethical practices.”[i]  Is there any evidence that this definition is true, or is it simply a euphemism for bad corporate culture?  Based on the results of the IIA’s report, the truth may lie somewhere in the middle.

I conducted a search for organizations with good tone at the top and financial performance consistent with their statements about ethical behavior and risk management.  One such organization is the Macquarie Group Limited, a diverse asset management firm out of Australia.  Macquarie is one of the few firms to produce a detailed risk report alongside their annual financial report.  What is striking about Macquarie is that few people have heard of them, yet their success is quite impressive as an asset manager.

Macquarie’s risk report goes on for 16 pages into how the firm has developed a strong risk culture based on three pillars:

  1. Ownership of risk management at the business unit level
  2. Understanding worst case scenarios
  3. Requirement for an independent sign-off by risk management.

The three pillars in the risk report represent a unique corporate culture that embodies risk management as a strategic imperative to achieving their financial goals.  The remarkable thing is that the financial results of the firm are outstanding!  In 2015, net profit was up 27 percent year over year, operating income was up 14 percent, earnings per share were up 31 percent, ordinary dividends were up 27 percent, return on equity was up 11.1 percent and the list goes on and on.  Does correlation mean causation?

Not always, but Macquarie’s annual report does focus on business strategy and risk management as the two core objectives in how they run their business.  The company’s outstanding performance in 2015 is par for the course for Macquarie, based on a review of the firm’s results over the past 10 years.  They don’t swing for the fences and may be too conservative for organizations seeking to be big for the sake of getting bigger.

Not surprisingly the annual report does not talk a lot about tone at the top, but does go into some detail about the ethics, risk management and business performance strategies employed to achieve their goals.  Clarity, consistency and unwavering commitment are the behaviors that speak louder than the sound bites of tone at the top, and remarkably, the results appear to follow in lockstep.

[i] https://en.wikipedia.org/wiki/Tone_at_the_top


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James Bone

James Bone

James Bone’s career has spanned 29 years of management, financial services and regulatory compliance risk experience with Frito-Lay, Inc., Abbot Labs, Merrill Lynch, and Fidelity Investments. James founded Global Compliance Associates, LLC and TheGRCBlueBook in 2009 to consult with global professional services firms, private equity investors, and risk and compliance professionals seeking insights in governance, risk and compliance (“GRC”) leading practices and best in class vendors.
James is a frequent speaker at industry conferences and contributing writer for Compliance Week and Corporate Compliance Insights and serves as faculty presenter and independent consultant for several global consulting firms specializing in governance, risk and compliance, IT compliance and the GRC vendor market. James created TheGRCBlueBook.com to provide risk and compliance professionals with transparency into the GRC vendor marketplace by creating a forum for writing reviews on GRC products and sharing success stories on the risk practices that are most effective. James is currently attending Harvard Extension School for a Master of Arts in Management with an emphasis in accounting and finance. James received an honorary PhD in Letters from Drury University in Springfield, Missouri and is a member of the Breech Business School Hall of Fame as well as the Missouri Sports Hall of Fame. Having graduated from the Boston University Graduate School of Education, James received his M.Ed. in Management and Organizational Design in 1997 and a Bachelor of Arts in Business Administration from Drury University in 1980.  

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