Tone From the Top, the Next Level

Opening

As a result of COVID-19, the Board of Directors and Senior Management are challenged to monitor the cultural shifts of their organization and adjust their sensitivity and the frequency of communications as appropriate.

Leaders should always try to find ways to talk and engage with their people to motivate them, especially during these uncertain and trying times. If done correctly, talking can be incredibly powerful. It can help relieve anxiety (defined as “a feeling of worry, nervousness or unease, typically about an imminent event or something with an uncertain outcome”) and help people find the strength they didn’t know was in them. Studies have shown that talking shuts down the brain’s fear center.

Judson A. Brewer, M.D., stated, “Anxiety is a strange beast. As a psychiatrist, I have learned that anxiety and its close cousin, panic, are both born from fear. As a behavioral neuroscientist, I know that fear’s primary evolutionary function is helping us survive. Fear is the oldest survival mechanism we have. Fear helps us learn to avoid dangerous situations in the future through a process called negative reinforcement.

So, without proper communication in a crisis, it’s easy for our people to spin and spread stories of fear creating social contagion. Thus, it’s fair to say, “Tone from the top” needs to go to the Next Level!

Background

“Tone from the top” received attention during the Sarbanes-Oxley (“SOx”) era when legislative, enforcement and governance policies were focused on corporate responsibility; i.e., behavior by corporate executive and directors that conforms to law and leads to the proper exercise of fiduciary duties to the company and its stakeholders. Remember, The SOx Act of 2002 was designed to deter the accounting scandals like Enron, WorldCom, Global Crossing, Tyco, and Arthur Andersen, which resulted in billions of dollars in corporate and investor losses. These losses created fear in the financial markets, and investor trust deteriorated.

First and foremost, Sarbanes-Oxley makes clear that a company’s senior officers are responsible for the culture they create and must be faithful to the same rules they set out for other employees. September 27, 2002, Speech by SEC Commissioner Glassman: Sarbanes-Oxley and the Idea of “Good” Governance

Again, in April 2019, we are reminded by the DOJ in their Guidance Document: Evaluation of Corporate Compliance Programs of the weight placed on company ethics and the “tone set at the top.” I am continually reminding boards and Chief Executive’s or CEO’s of the strategic importance of ethics and values and that they should not be underestimated.

Today the importance of ethics and values still apply; however, leaders also need to ensure their communication and actions project competence, confidence, and compassion (The Three C’s ™), which is especially important in times of crisis.

The nature of 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 soft 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. Now add in panic, which is defined as “sudden uncontrollable fear or anxiety, often causing wildly unthinking behavior,” and it’s easy to understand why the Tone from the Top must get to the Next Level.

Control Environment

A strong control environment supported by a sound Tone from the Top and is the cornerstone of a system of internal controls that supports the financial reporting oversight role of the audit committee.

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 places a 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 roles 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 affect factors related to the control environment and other components of internal control, but it’s 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. 

Reworking the Definition

Volkov is right, and I believe we are closely aligned on the proper definition, which is “Tone from the Top” implies there is a sound and repeated commitment from the Chairperson of the Board, the CEO, and other senior leaders throughout the organization to emphasize with competence, confidence, and compassion the strategy of the organization and 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 (16) years, I have been barking about this subtlety. I’ve even expressed my opinions to Dave Richards and Richard Chambers, the former and current leaders at the IIA.

I firmly believe the tone needs to move or cut down, across, and even resonate through the organizational layers and the extended enterprise. To me, “at” implies the tone rests at the top and doesn’t move like I previously mentioned. Soon after I realized this during a speech, I was delivering circa 2004, I revealed what resonating meant to me, which was the mood in the middlethe buzz at the bottom, and the tolerance towards third parties

Closing

The proper Tone from the Top is critical. It will dissipate fast unless there is a genuine 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 as well as building relationships throughout the organization one at a time. Moreover, without the right Tone from the Top and communication of the message, you could be encouraging fraud!

Remember, communication includes a sender, medium, receiver, and what’s often missing, feedback. An impactful message includes competence, confidence, and compassion!

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 sensitive to our circumstance and 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! Several organizations 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.

 

Best!

Jonathan T. Marks, CPA, CFE

 

 

Attribution:

New York Times

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