How does business ethics mutate under the pressure of a crisis? Where are the pressure points and what will be the reaction of regulators in terms of focus? Have we finally reached a point where public sector compliance surfaces and what are the challenges facing a disrupted compliance landscape? Anthony Smith-Meyer explores the impact of crisis on compliance and ethics functions and where it might lead us “post-vaccine”.
In the midst of a catastrophe, actions and decisions tend to be intuitive and impulsive. All that matters is stopping the leak, shoring up our construction, or, metaphorically or perhaps occasionally, actually getting the cow out of the ditch. Whether our intuitive behaviour and actions will later be judged as right or wrong, fair or abusive, does not enter into our thinking. In the pursuit of survival, people in a disaster have behaved horribly, whilst others have sacrificed themselves to help others.
Studies have queried how much of our attitude, personality and behaviour are determined by genetic factors, and how much is a function of upbringing and social conditioning; and the conclusions have enough variance to leave plenty of room for debate. However, they all agree that DNA and education are both a part of who we are. At the moment of highest stress, when we have to act to survive, then our genetic preference for fight or flight may indeed be what determines our immediate response. When catastrophe hits, we have no time to consider our options or to be proactive; we are pushed into the proverbial corner; we can only react.
It was my colleague, Professor Ludo Van der Heyden of INSEAD, who explained that catastrophe is something that happens to us, it is humans who make a crisis of it. The very notion of a crisis implies that we are faced with conscious dilemmas and hard choices. It is the awareness that our actions have consequences that shapes the nature of the crisis before us. An outbreak of Ebola virus is a catastrophe for the society and people it affects; it is our efforts to contain it and to tend to those who need help that requires crisis management.
The Corona Ethics Challenge
The current pandemic crisis is occurring at a number of levels; in healthcare, politics, democracy and the economy; at national, industrial and individual levels. At a time when our instincts are to look to our narrow interests as individuals or families, we also know that – as long as we can trust one another – we are better together; that two heads are better than one. Faith in the integrity of others, trust that our partners will reciprocate our help and have our best interests in mind, is at the heart of successful crisis management. This mutual confidence in a common understanding of ethical behaviour is essential to ensuring successful outcomes from the chaos of crisis. Betrayal of mutual confidence hurts us all, and who hurts us is forever remembered for it. For a business, the extent to which its actions today are founded on the greater good or selfish greed, will determine its fortunes; both today and tomorrow.
Business Ethics Under the Cosh
There has been much written about the social and environmental responsibilities of business and commerce at a time of crisis, such as we are now experiencing, and how it serves long term success (including by myself: Ethics, ESG and the Corona Age). This is not the subject of this article, however. Of the ESG topics, it is Governance that is the most critical aspect at the peak of crisis. Crisis management requires the discipline of an effective governance framework and a clarity of purpose and values to keep concerns such as environmental and social responsibility front and center – it is also what is required to ensure that the company remains in control of its cash flow and liquidity situation; to allow the firm to stay afloat. Without governance, there is no process, and without process we are no longer capable of being proactive; we revert to a state of catastrophe.
To understand the current pressure on business ethics, we have to consider the three main theatres in which the struggle is ongoing:
- The marketplace
- Government procurement
- The company
1. The Marketplace: Market Morality and the Law of the Jungle
The market has no conscience, and those acting within it are encouraged to act on strictly measurable financial drivers of behaviour, with no consideration of the non-financial consequences of their actions – “if it is not forbidden, it is allowed”. Many liberal economists will proclaim that the “Invisible Hand” of Adam Smith will fairly apportion and correct the allocation of resources to satisfy the needs of individual consumers and society. However, even Adam Smith explained that his theory pre-supposes a strong element of morality and ethical judgement for his theory to remain functional. He was not a proponent of the “survival of the fittest” in the stark terms of the laws of the jungle.
Unfortunately, human behaviour – if unregulated – is not always as honour-seeking as Adam Smith assumed in his argumentation. More commonly it is egocentric and greedy for the maximization of profit to the few. The corporate veil provided to shareholders and their appointed agents responsible for managing the firm only facilitates and rationalizes the pursuit of advantage; fair or not.
At times of war – history is strewn with individuals who have made fortunes as profiteers, or who have gained more or less significant advantage as collaborators to the invader. Equally, there are those who would profit from the plight of others when catastrophe strikes. We need to look no further than the human smugglers of refugees who demand extortionate fees from their unfortunate “clients”, only to load them onto boats unsuited for the voyage they are sent on.
In the absence of ethical and regulatory frameworks, the market of demand and supply can be ruthless. Happily, our business and commercial world is largely trustworthy due to regulation and the forces of law and order – hence, in most cases – our market actors maintain a sense of propriety; but not always.
The financial markets are generally subject to usury laws – due to the past misbehaviour of unscrupulous financiers. However, where there is an excessive profit to be made from market imbalances, there are those who take advantage by charging exorbitant, albeit legal, prices. We observed this in Italy when the pandemic was raging at its worst, and where manufacturers of medical masks charged €130 per kilo of material, compared to normal prices in the order of €5[ii]. Whereas most shops avoided the temptation to opportunistically inflate their profit margins on toilette paper, alcoholic wipes and facemasks, and some even rationed sales per customer, there were also numerous examples of price gouging – profiting on the fears of customers.
The raw marketplace is, for all intents and purposes, a jungle. The strong and the powerful eradicate the weak and vulnerable. Even government crisis packages, meant to help the latter, remain inaccessible to many freelance workers and small businesses. Simple market economics will propagate the domination of the larger market players. How they behave and use this increased supply side power will strengthen or diminish their reputation.
“Compliance Pause” has become a thing
In their desperation to survive the catastrophe, and live through their crisis, businesses will look for ways to generate cash flow and bolster liquidity. Some entrepreneurs will have to take measures that will go against their personal values and priorities that have sustained their business to date. Long-term employees will be let go, and customer promises no longer be possible to keep. Under such pressure, it is not surprising that many will look for ways to cut corners so that they may be able to “keep going” just that little bit longer.
It is in this context that some hope to ease up on their compliance and quality control checks. In his FCPA Blog entitled “After Covid-19, will “compliance pauses” be part of the recovery?”, Richard Bistrong notes that “executives and sales teams will be clamoring for speed, with compliance officers caught in between those pressure points produced by the need for speed.” It is a fair question, and a realistic one.
2. Government Procurement: “Swift and Smart” Solutions?
While businesses and the recently unemployed look for lifelines to survive their personal catastrophes, our governments are struggling to manage a crisis. Whether the pandemic was foreseeable or not, whether contingency planning was deficient or negligent are not the questions to be debated in the face of tragedy. The fact is that most governments where caught unprepared for a pandemic, and their task remains to try and control the outbreak and to provide their health services with the medicine and equipment needed to perform their basic duty to individual patients and society. As the crisis continues, the need to minimize the damage being done to the economy rises amongst conflicting priorities. This task has one common factor, money; lots of money. And where there is money, corruption will follow.
The EU, famously, has a stringent Single Market regime for public procurement. Its principal purpose is to ensure that those competing for public contracts are qualified, competitive, and that the selection process is free of influence and nepotism, and fair to all participating in the tender. It was not put in place to increase bureaucracy and to slow the procurement process; it was to suppress and expel corruption and bribery as far as possible from the process, increasing institutional trust and saving taxpayer money along the way.
As we have already pointed out, when we are confronted with catastrophe, we do not have time for reflection – we have to act. So when the EU issued procurement guidance for governments to seek “swift and smart solutions”, it was merely an acceptance of realityii.
Empowerment of the Unready?
When you ask a bureaucracy to be agile, however, what can go wrong? The answer is: plenty.
- There has been a plethora of new companies names being registered; all related to Corona, Covid, Health or similar.
- Unqualified middlemen (some with extensive non-health-related networks; others with no networks to speak of) have appeared to tender their “expert services”.
- Industry lobbyists have clamoured to have favourable amendments included in emergency legislation aimed at helping weak and vulnerable shop owners[iii].
- Officials face the temptation of accepting bribery or favouring politically well-connected tenderers.
In every situation of bureaucracies doing their best to be “swift and smart” in their response to a catastrophe the cost of corruption and fraud has been significant.
When hurricane Katrina hit New Orleans in 2005, it caused $161 billion in damages, and over 1 million people were displaced. The US government estimates a minimum of $1 billion were lost through fraud and the misappropriation of funds; 17 public officials were arrested on corruption charges including mayors, a senator and a judge[iv].
The Covid-19 crisis is generating a financial response of trillions of dollars. To place one’s confidence in common decency and community spirit is to fly in the face of experience and history. There is only one way to tame the law of the jungle, and that is by enforcing the regulations that render it civilized. However, the work of enforcers and legislators are curtailed by the same health restraints as the businesses and industries they are meant to monitor.
Role Models of a different type
Politicians, who we need to be role models of integrity and calmness during this period, are split between those who are transparent and open about the challenges they are grappling with, and the many others trying to “save face” or manipulate the crisis to play old political games in the promotion of a partisan political agenda. This form of fiduciary corruption will impose additional costs to society, to the benefit of special interests. It is exactly the type of behaviour that makes for the wrong kind of role model for business and commerce, not to speak of citizens.
At the individual level, we already have examples of politicians who, in possession of privileged information engage in what, in moral terms, can only be described as insider trading and market manipulation. US Senators Diane Feinstein ($7.5mio via a blind trust managed by her husband), Richard Burr (circa $1.5mio), and Kelly Loeffler (trading upwards of $3mio) reportedly made favourable trades based on confidential government reports on the impact of Covid-19 on businesses – all while assuring the public there was nothing to worry about[v].
Also at the institutional level, government is seen to cut corners and “temporarily suspend” their moral vigour as China clamps down again on human rights activists in Hong Kong without comment, Canada quietly approves arms sales to Saudi Arabia in the face of sanctions imposed relative to the murder of Jamal Khashoggi[vi], and the EU hardly comment on the anti-democratic measures being imposed in Hungary, a member country. At the worst point of panic as catastrophe turned into crisis, governments were even confiscating much needed personal protective equipment in transit, preventing the cargo from reaching its rightful destinations. Alas, most governments have not been a shining example of ethical behaviour.
3. The Company: Business Pressure for a Compliance Pause
What then of the ethical behaviours and expectations placed on the company? If the marketplace is full of predators and governments are failing in their leadership, can we expect board directors and executives of businesses to behave differently under the strain?
Companies have been in a state of catastrophe. Initially confronted with increasingly fearful consumers and employees, then the lockdown. Companies could only react to events as they happened – the only priority there could be was to stabilize and keep operations afloat. Many companies had to “batten down the hatches” and are hoping for the best, whilst others have tried to take advantage of government help to stay their execution in the hope of a quick return to normality. A lucky few have experienced a sudden rush of demand and are facing a different type of struggle – one of riding the wave of opportunity.
As business leaders get their bearings, including the brutish realities of the markets and political influences, there will be many temptations for them to seek shortcuts to recovery, or even desperation as some reach out for a lifeline. The yardstick against which these board members and executives must measure their actions, their willingness to commit further capital and personal endeavour, must be that of success over the medium and long-term rather than short-term victories that involve long-term sacrifice of opportunity.
A Tempting Proposition
The immediate challenge facing businesses as they emerge from confinement will be pressure to make up for lost time, to reestablish cash flow, and identify and take advantage of the disruption caused by crisis. In order to achieve these near-term objectives, it will be tempting to look the other way when confronted by moral choices; to cut corners on anti-money-laundering and anti-bribery and corruption measures, to neglect “costly” duty of care responsibilities.
It may even seem timely to do so. Regulators and enforcement agencies themselves are understandably stretched and disrupted. Even internal control functions pertaining to the firm are restrained in their ability to effectively monitor activity and transactions entered into from kitchen tables or in offices that are at some distance from head office.
Business ethics must stand firm or else
Already before the Corona crisis, there was an increasing clamour for corporate responsibility, a demand that business regain the trust that has been lost over the decades of globalization and the financial crisis of 2008/09. There are many academics, practitioners and politicians who have been preaching this message for several years. Increasingly, companies have been (sometimes reluctantly) accepting the need to establish Compliance and Ethics functions, Corporate and Social Responsibility or Sustainability departments and accept that employees, as well as consumers and other stakeholders must be heard. The adoption by the US Business Roundtable of stakeholder driven purpose in August 2019, was a bellwether of a change in tone[vii]. For some, it has only been a public relations exercise, but for others it was an acceptance that consumers, employees and society now have the interest and power to stand in judgement of the conduct of market players[viii]. Marketing experts, business consultants, business schools and regulators are delivering a consistent message. Henceforth, ESG, Environment, Social and Governance, is the foundation stone by which the license to operate and long-term success is being measured. Whereas anonymous market operators and insignificant politicians may choose to seek short-term advantage, for any leader, employee or business who wishes to represent a trusted and reliable brand with whom others will want to do business, it is essential they act in “a manner becoming” of the trust of consumers and society; show empathy to employees and social issues; tackle the coming environmental crisis with foresight; do the right thing. Any adaptation of a lower standard will render “swift and smart” expediency more than expensive – it can easily lead individuals and corporations to their ultimate demise and ruin.
The Comings and Goings of Cynics
The cynic executive will undoubtedly dismiss such assertions as alarmist – much as the masses can be shocked one minute, they forget and revert to old habits the next. Yet, a lot has changed since the hay days of the Adman days of the 1960’s and 70’s when the public gave those in a position of power the benefit of the doubt. Rather, the reverse is true and the public is in search of trustworthy individuals or institutions – it is no longer taken for granted. The negativity bias, by which we pay attention to, or even expect, hints of danger or distrust in others, is increasingly applied to commerce, politics and media. The so-called, relationship management “Gottman Ratio” concludes that a relationship will survive if the protagonist experiences five good things for every bad one[ix]. Just as a reputation can be lost in an instant, so trust can be damaged by an act judged to reflect a lack of empathy or concern for others – and if not shown to be a rare misjudgement, negative associations will stick.
- Some stakeholders have longer memories than others. In B2B terms, key suppliers and distributors may wish to distance their association with partners of poor reputations as a matter of enlightened self-interest.
- Even if old customers can be replaced, it is hard to think of a business where retaining clients is not considered a profit driver.
- Millennials and Generation Z are shown to hold less allegiance or sense of duty to their employers than Baby-Boomers. Almost half the workforce (and growing) is more likely to seek alternative employment or care less about productive outcomes if they cannot identify themselves with the corporate mission and values.
Elephants and Regulators Never Forget
Having a bad relationship with customers might be overcome if your business can tolerate a high turnover of clients and any stigma associated with the brand (such as offering the cheapest product, or a very superior one). However, in jurisdictions with high levels of institutional integrity, the long arm (and memory) of the law remains a Damocles’ sword waiting to fall.
It is not unusual for regulatory or police investigations to take place retroactively and for verdicts to be delivered even a decade after the events. Directors and executives might face criminal charges or financial sanctions years after what seemed a common sense action at the time.
As in the aftermath of any crisis that exposes misconduct, there will be a political and regulatory reaction. Apart from the inevitable and dreaded “look-back” investigations involving the hiring of expensive expert forensic consultancy firms, there will a shift in the regulatory goalposts. The legislative response is more than likely to include:
- Tightened rules on transparency.
- Stricter requirements on identifying beneficial ownership.
- The redefinition of corruption to include nepotism and influence peddling.
- Tightened insider trading rules for government officials.
- Broader whistleblower protection measures.
- A greater compliance & ethics presence in the public domain.
- More expansive requirements for the monitoring of agency risks (health and security in the supply chain, duty of care to clients by distributors, etc)
Where regulations tread, compliance officers must follow, but as companies come to grips with the impact of the Corona catastrophe on their business, so will the role and scope of the compliance function grow as a result.
- The strength and nature of corporate cultures have been put to the test during a period of relatively lax monitoring. Compliance, together with their colleagues in Human Resources no doubt, will be expected to assess its condition and evaluate how it may be improved or bolstered once normal operations resume.
- The already evident need for corporations to emphasize corporate responsibility and ESG will be turbo-charged as companies start to realize that integrity and trustworthiness have become a competitive calling card.
- The rush to remote working and digitalization will have exposed frailties in the compliance function and require a fresh look at its effectiveness, its focus and its efficiency.
- The disruption to operations and increasingly loose organisational structure resulting from remote working and digitalization will require greater coordination and reducing “turf” conflict with other Internal Control units. In addition, IC functions will need to improve collaboration and find common cause with Public Relations, HR, Marketing, to name but a few.
- Compliance will need to expand its focus from internal monitoring to external relations with the compliance functions of competitors in order to facilitate more collective action with local authorities against common challenges in the corruption and money-laundering arena.
In the meantime the more traditional housekeeping tasks will need to be maintained and enhanced to be able to:
- Accentuate current awareness amongst business units of their accountability for current actions and outcome that will be revisited at a future date.
- Prepare for more investigations and evaluation activity to catch-up with currently disrupted reporting.
- Prepare records now for Look-Backs that will be required tomorrow; internally, but also by regulators.
No Time to Sit Back
The US Treasury recently said that in the event of compliance breaches, they would take Covid impact into consideration– but only if firms are doing everything possible to prevent them still – a “compliance pause” is not a thing![x]
The Corona Age is stressing existing compliance arrangements and regulatory frameworks. The crisis-induced disruption to controls and enforcement is revealing cracks and opportunities to be exploited by the criminal and the opportunist. Organisations that have invested in ethical cultures and values-led purpose will be able to free-wheel this uncertain time more easily than those who have not, but the need to monitor and verify compliance with, not only the letter of the law but also the spirit of the law, will be the same for all organisations. It may not be the comfortable transition to greater emphasis on ESG that many companies were hoping for, but only the foolish will disregard these increasing demands by society and consumers and not ensure that in emerging from this Corona crisis, the emphasis will be on shifting to a mindset that is best suited to establishing ESG credentials to win the hearts and minds of future consumers, employees and investors.
[viii] The Post Truth Business – Sean Pillot de Chenecey (2019)