I am constantly reminding boards and Chief Executive’s or CEO’s of the strategic importance of ethics and values and that they should not be underestimated.￼
The nature of a corporate culture can be the difference between a thriving and a beleaguered organization, and it all starts at the top!
I have witnessed first hand that employees that have interpreted the lax tone set in executive offices as corporate approval to take on more risks, even with a well-defined and communicated risk appetite and risk tolerance, which sometimes crosses the line on fraud.
The control environment – that is, the overall attitude, awareness, and actions of directors and management regarding the internal control system and its importance to the organization – is the key to setting the tone of the organization because it influences the “control consciousness of its people.” Factors that contribute to the control environment include, but are not limited to –
- Integrity and ethical values communicated by executive management in speaking and writing and demonstrated by action;
- Responses to incentives and temptations – clear policies and actions that prohibit the acceptance of inappropriate gifts, for example;
- Moral guidance, as communicated through a code of business conduct and ethics;
- A commitment to competence, as demonstrated by robust human resource policies and clear job descriptions for the purpose of hiring and retaining qualified people;
- A board of directors and audit committee that are engaged, ask questions, and take appropriate action;
- A management philosophy and operating style that place high value on risk assessment and internal control;
- A well-defined organizational structure that is appropriate to the company’s size and complexity;
- Appropriate assignment of authority and responsibility, with well-defined authority and duties that are appropriately segregated to prevent or detect error and fraud;
- Human resource/capital recruiting and retention policies and practices to ensure that human capital is valued; and,
- Ways to settle internal differences, such as a forum to discuss and settle differences of opinion between management and employees.
In any organization, the buck stops with the CEO: He or she has ultimate responsibility for the internal control system.
A positive control environment is a big part of maintaining effective internal controls. More than any other individual, group, or function in the organization, the chief executive sets the tone from the top through various messages, conduct, and other activities that affects factors related to the control environment and other components of internal control, but its not a one and done exercise, or as I say one blast from the trumpet!
Mike Volkov once said, In reality, “tone-at-the-top” is not really just “tone-at-the top” it is a lot more. I will try to be clear. Most people think that tone at the top is satisfied once the CEO puts out a statement of commitment to compliance.
Volkov is right and I believe we are closely aligned on the proper definition, which is “Tone from the Top” implies there is a strong and repeated commitment from the Chairperson of the Board, the CEO, and other senior leaders throughout the organization to emphasize the importance of compliance and ethical conduct, which is embraced, integrated, and operationalized into every level of business operations.
At or From?
You’ll notice that I use tone “from” rather than “at”. Why? For more than fifteen (15) years I have been barking about this subtlety. I’ve even expressed my opinions to Dave Richards and Richard Chambers, the former and current CEO’s at the IIA.
I strongly believe the tone needs to move or cut down, across, and even resonate through the organization and the extended enterprise. To me “at” implies the tone rests at the top and doesn’t move like I previously mentioned.
The Tone from the Top will dissipate quickly unless there is a true and on-going commitment from the board and senior leadership, which includes the Chief Compliance Officer and the Chief Audit Executive to send the right message using various mediums.
Remember effective communication includes a sender, medium, receiver, and what’s often missing…feedback.
The actual message from the top is not just we will comply with the law. The message must be broader. For example:
Our organization is committed to the highest ethical standards in every facet of our business, like our business practices, sales practices, legal counseling, human resource practices, and treatment of employees and customers.
Lastly, some of the best organizations make ethics part of their corporate branding and values. Why? Because doing the right thing, even when no one is watching is profitable – this is called the Ethical Premium! There are several organizations that have examined the correlation between organizational justness and performance and the results are those organizations that have morals and ethics often outperform their competitors!
For those that like to read, I suggest picking up a copy of “Firms of Endearment: How World-Class Companies Profit from Passion and Purpose“, by Raj Sisodia. The book is interesting, because it points the way that all businesses should aspire to emulate and ultimately transcend.
I welcome your thoughts and comments.
Jonathan T. Marks, CPA, CFE