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When one evaluates the reasons for the fall of companies such as Enron, Lehman Brothers and WorldCom, what connects the dots is a stupefying disregard for ethics. Closer home, Ranbaxy's recent run-in with the US Food and Drug Administration has invited renewed questions about the governance, compliance and ethics practices of a section of firms in India and indeed across global economies.
While there is no reassurance in stating that incidents like Ranbaxy or Wockhardt or the fact that some of India's best-selling small cars have failed independent crash tests conducted by a global car safety watchdog are aberrations rather than reflections of a systemic problem, misconduct within its own walls remains one of the most lethal threats to any organisation. Put in another way, a lack of ethics is like a missed opportunity in a world where competitive advantage is fast becoming a commodity. Says Rita McGrath, a professor at Columbia Business School, and author of The End of Competitive Advantage, "Companies can build advantages on the basis of ethics. High ethical standards tend to be correlated with other positive attributes such as attention to quality, fair dealings with people and transparency that can give organisations an advantage."
Needless to say, the benefits of good corporate governance and a culture of ethics percolate down to all levels of stakeholders - investors and top-quality employees are attracted to ethical companies. Given that, what are the challenges that prevent companies from embracing and - more importantly - sustaining a culture of ethics and good conduct? What are the ways in which companies can ensure they don't stray from their intent at the time of establishment? And what is the best way to react if a situation involving an ethical transgression does arise?
The 'why'
In his book The Tipping Point, Malcolm Gladwell has spoken about the 'Broken Windows' theory that draws from the field of criminology. It states that crime tends to increase in situations where the atmosphere reflects that 'anything goes'. If a broken window is not repaired, it somehow gives a message that it is okay to break more windows. The norm applies in the corporate setting too.
Integrity, which is one of the core values of any organisation, should be held above all other forms of behaviour. "At the heart of an ethical culture are the shared values and assumptions of the people in the organisation. These provide the overall direction for the behaviour of employees," says Mona Cheriyan, director, human resources, ASK Group. "A strict enforcement of codes of compliance and a culture of zero intolerance for malpractices and frauds deter any probable ethical lapses," adds Abhay Gupte, senior director, Deloitte.
Having said that, it is difficult for a company to decide and craft an ethical corporate culture somewhere down its journey. It has to be done right at the beginning. "It should be in the DNA of the promoters and leaders, and must be part of everything that the company does from day one," says Narayan PS, vice-president and head, sustainability, Wipro.
While we know that senior leaders set the tone for action, they do not by themselves achieve the outcome for the organisation. It is how leaders act to promote right action that determines the performance and the culture. "While ethical codes may vary from company to company, the basic fabric remains the same," says Dilep Misra, president and head, corporate human resources, JK Organisation.
At all times, management must take cognisance of staff turnover and grievances, customer complaints, product defects and returned items, expressed dissatisfaction of contractors and suppliers, cases of litigation triggered by unethical behaviour, and community unhappiness with corporate behaviour as reflected by media reports, citizen protests etc. "The prevailing environment in society is so poor and corruption is so widespread, that creating an oasis of ethics is challenging. The only way out is that the tone has to be set at the top, else ethics will just be lip service," says Ravi Venkatesan, author and former chairman, Microsoft India.
Ethics also includes placing the organisation's interest before the promoter's interest. "For instance, the employment of a promoter's son should be driven on merit and not on anything else," says Harish Mariwala, chairman & MD, Marico.
Often those integrity failures are a result of senior individuals crossing ethical boundaries. "In a hurry to reach to the top and to beat competition, they compromise on ethics," says author and leadership guru MS Rao. One must note that having a culture of ethics and compliance in a corporation is not a guarantee that there will not be breaches. What saves a company is the swiftness with which it redresses its wound.
| More compliance may not equal better compliance: Mritunjay Kapur |
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The business landscape today is extremely dynamic, complex and global, and accordingly so are the risks and challenges. Add to this a plethora of regulations that vary by state, country, industry, ownership structure etc, and are continuously evolving. A typical response to new regulation is a new compliance activity around it.
However, as regulations keep changing, the risk is that these individual compliance activities become a patchwork solution that is piecemeal and uncoordinated. This creates inefficiencies and redundancies, and may lead to them not being done in the right spirit but merely as a tick in the box. Management would then often tend to see this as a burdensome cost of compliance.
Another dimension to this debate deals with the tone from the top, consequence management and culture. Some companies would see compliance as a hygiene activity that needs to be done to a bare minimum and is a drain on resources. This attitude is most visible based on how companies respond to non-compliances and the entire consequence management process. Non-compliances will keep increasing if not taken seriously; eventually, even reactive mechanisms will become inadequate to manage risk exposures. Also while compliance can be performed through elaborate processes and techniques, companies are truly successful if they can build a culture of compliance. In both the short term and long term, companies that succeed will be those that can demonstrate resilience — the ability to drive business performance and achieve regulatory compliance in an environment in which these two outcomes must be managed strategically, with agility and equal importance. Such an approach must be efficient, sophisticated, practical, integrated and proactive (rather than reactive). This can only be achieved by a holistic approach based on the convergence of governance, risk management and compliance.
Companies need to step back and put thought around the following four aspects:
- Risk profile: Understanding and quantifying risks and their exposure
- Culture and behaviour: Embedding a culture of ethics and risk management in everyday behaviour
- Governance, organisation and infrastructure: Effective oversight of business processes and decision-making, quality of corporate governance
- Enterprise assurance: Ongoing evaluation, monitoring and reporting on the effectiveness of controls.
(The views expressed are personal)
Mritunjay Kapur,
partner & head, risk consulting and strategy, KPMG India
partner & head, risk consulting and strategy, KPMG India
The 'how'
The Tata Group, known for its high 'trust' quotient, believes creating an ethical culture is a journey "from compliance to commitment to consciousness". "It is not a question of the number of rules, but embedding desired values in each employee's consciousness, so that ethical conduct is a spontaneous output," says Mukund Rajan, member, group executive council and chief ethics officer, Tata Sons.
To make core values explicit, and to demonstrate how they translate into behaviour in the daily business, an organisation should establish formal norms, including codes of conduct, and guidelines and these should be led from the top, says Cheriyan of ASK Group.
Some prerequisites can help a corporation foster ethics in its DNA: there should be clearly enunciated policies,
a basic code of conduct, regular communication with employees and a swift investigation system in case of reported malpractices. Here the perspective and role of corporate boards of directors in overseeing ethics and compliance matters within their firms cannot be underestimated. The Board could also insist on a compliance certificate every quarter, and this certificate ought to be vetted by the audit committee. In fact, audits are good detection mechanisms to keep a tight leash on transgressions - a type of consequence management. In simple words, audits form the execution part of an ethical culture. While internal audits help create a culture of ethics, external audits give out a message to outsiders about the internal culture of ethics. "The Board must mete out punishment, including sacking the CEO if he is found guilty," says TV Mohandas Pai, chairman, Manipal Global Education Services, and an ex-Infosys hand. "Once the punishment is certain, the culture is firmed up."
That is the easier part, the benefits of which have been well documented. What is critical is to understand that ethics is different from compliance. The latter is the straightforward 'rules and regulations' part of ethics, and doesn't require high education. Ethics is a larger universe that goes beyond just following the law, and therefore, reflects how a company is oriented. It is possible for a company to be legally compliant and yet not have a strong culture of ethics.
The process of creating a culture of ethics probably starts from the process of recruitment. While hiring a person, it is not enough to assess only his/her professional and technical competencies. It is equally important to look at the fit with the values of integrity and ethics. Here's how Wipro does it: its employees - campus and lateral hires - are inducted into Wipro's ethics journey at the very start of their association with the company. Thereafter, mandatory annual test and certification process, leadership training sessions, electronic mailers, posters etc constantly guide employees to follow the Wipro Code of Business Conduct (COBC). Any breach of COBC, identified from concerns raised through Wipro's Ombuds process, is handled swiftly and with seriousness, reveals Padmanabhan A, deputy general counsel and head, compliance, Wipro. The principle of zero tolerance towards non-compliances is repeatedly communicated unequivocally to all employees.
The COBC has over 30 policies that address various facets of corporate ethics. On its part, the Ombuds process is an independent function that is mandated to receive, investigate and redress concerns, including all ethical issues raised by employees and other connected individuals. Such concerns are documented, monitored and reported periodically to the Corporate Compliance Committee and also to the Audit Committee comprising independent members of the Board. On a similar plane, the Board at JK Corporation meets every quarter to check on compliance breaches.
The 'what if'
But sustaining an ethical culture doesn't come without its challenges. It is particularly difficult to create and sustain this culture in a dispersed global organisation. First, you have to define the culture and create a shared meaning of ethics across the organisation. For instance, a media house may prohibit giving or receiving gifts, which could be an ethical guideline. But in India, gifting is accepted as part of culture, so a guideline like that could go against the popular wisdom, which poses a challenge.
Second, how do you propagate the non-negotiables? "If you define many things under ethics, the education challenge in the company is high," says Santrupt Misra, CEO, Carbon Black Business and group HR director, Aditya Birla Group. But the real moment of truth is how a company reacts to the ethical crisis. Does it wait for someone to point it out or accept it publicly and make corrections proactively? Or worse - does it play the blame game?
That apart, ambitious Indian companies wanting to play the global field must bear in mind that often, norms of the West may be more stringent than the ones back home. Critical lapses may not be overlooked so easily, as the case of Ranbaxy demonstrates. This is also a shift from the experiences of the past, when expectations from Indian companies were low. "It is now important for corporate India to match up to global standards," says Mariwala.
A handful of companies
The Strategist spoke to argued if they were to comply with all the innumerable laws, it will slow processes down. "But in the long run, look at the damage you will do to your own reputation and brand salience if you don't comply. You will have a longer ground to cover," says Rajeev Dubey, president, group HR, corporate services and aftermarket, Mahindra & Mahindra. "At the end of the day, good reputation means good business. And reputation can't be outsourced."
