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compliance-fatigue

In the first half of 2014, anti-corruption enforcement actions by the U.S. alone cost the business community more than $500 million. It would seem logical that as a result anti-corruption compliance would be at the forefront of every multinational corporation’s activities. But that’s not the case, at least as described in the 2014 Global Fraud Survey, perhaps one of the largest and most credible surveys on the topic, released by Ernst and Young (EY) earlier this summer.

The report indicates that businesses around the world are suffering from what EY has dubbed “compliance fatigue.” After surveying more than 2,700 business executives in 59 countries, EY discovered that “despite the aggressive enforcement environment…the percentage of companies that have anti-bribery/anti-corruption (ABAC) policies has increased by only 1%.”

According to the survey, the reason for such stagnation rests with chief executives who are reluctant to participate in compliance training programs and take other necessary steps. EY does note that “the majority of businesses have put in place many of the building blocks of effective compliance programs.” However, “one-fifth of respondents say that either their business does not have an ABAC policy or that they do not know if there is a policy” representing a “persistent minority” of firms that have yet to adopt any measures to prevent bribery.  Within this minority, the report shows that executives are not only apathetic towards compliance, but “are willing to act unethically to win or retain business.”

Because executive officers face greater exposure to corruption risks, EY posits that the best course of action to alleviate this compliance fatigue is for boards of directors to maintain a high level of pressure on C-suite executives to ensure they are taking the necessary precautions. The survey authors state, “This level of scrutiny will drive a higher level of engagement among senior executives.” This solution, however, hinges on the idea that board members have sufficient knowledge and understanding to provide such oversight. Unfortunately, CIPE’s work in emerging markets around the world have shown that this is not always the case.

Even in Russia, where a relatively new anti-corruption law requires companies to establish compliance programs, the ability of directors to provide oversight is limited. According to long time CIPE partner Igor Belikov who heads the Russian Institute of Directors, levels of familiarity with anti-corruption programs vary significantly across industry sectors.  While directors in certain sectors such as banking are well versed in compliance issues, those in more industrialized sectors such as manufacturing often do not fully appreciate the risk that corruption brings.

Compounding this lack of knowledge, Belikov indicates that “board discussions are too often focused on reports provided by executives [and] discussions about how top executives set the tone [in the company] and provide personal examples for their subordinates are rare cases.”  If EY’s suggestion of boards taking a leading role is to succeed, board members must be educated so that they can “reach beyond formal programs and have a better understanding of compliance.”

To achieve this Belikov suggests that “directors should be exposed to training programs as well as specialized discussions” on what tone from the top means and how to successfully implement such a strategy.  Belikov notes that the driving factor for behavior is the “general business climate and overall morale in society.”  Such as this is, he suggests the best strategies for raising awareness include making a business case to company directors by “analyzing the extent to which international/foreign anti-corruption and other compliance regulations may affect the company [and] proposing internal controls that may cut any losses.”

In many markets, adhering to compliance procedures is perceived as “bad for business” because competitors will not necessarily follow suit. To overcome this obstacle, Belikov says, “Raise the issue of anti-corruption practices in the leading business associations to develop a voluntary set of standards.” By doing so, the entire business community gains a stake in the process and all have an incentive to participate.

Given the risk environments that many businesses face in emerging markets, it will be challenging to change mindsets.  In many countries, boards are concerned with far more pressing issues such as violent conflict and fighting against unfair market conditions.

However, with continued efforts to educate decision makers at the tops of organizations and innovative ways to develop buy-in, “compliance fatigue” can be overcome.

Frank Stroker is an Assistant Program Officer for Global Programs at CIPE.