Tone from the top: Leadership’s challenge during a crisis

Authored by Jonathan T. Marks, CPA, CFF, CITP, CGMA, CFE and NACD Board Fellow

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As a result of the COVID-19 coronavirus, boards of directors and senior management teams are challenged to monitor the cultural shifts of their organizations and adjust both the sensitivity and frequency of their communications.

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Leaders must find ways to engage with their people to motivate them, and this becomes increasingly important during uncertain or trying times. If done correctly, talking can be incredibly powerful. It can help relieve anxiety 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.

As Dr. Judson A. Brewer stated in a recent New York Times article, “Anxiety is a strange beast. As a psychiatrist, I have learned that anxiety and its close cousin, panic, are both born from fear.”[1]

Fear and anxiety can be debilitating. Without proper communication in a crisis, it’s easy for people to spin and spread stories of fear, creating social contagion. To balance this tendency, in a crisis, leaders need to take their “tone from the top” to the next level.

Learning from previous crises

“Tone from the top” received a lot of attention during the early 2000s, when legislative, enforcement, and governance policies focused intensely on corporate responsibility. At the time, accounting scandals resulted in billions of dollars in corporate and investor losses. These losses created fear in the financial markets, and investor trust deteriorated.

One of the primary objectives of the Sarbanes-Oxley (SOX) Act of 2002 intended to address these fears and lack of trust by enforcing behavior by corporate executives and directors that conforms to law and leads to the proper exercise of fiduciary duties to the company and its stakeholders. As SEC Commissioner Cynthia Glassman noted in a speech at the time, “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.” [2]

More recently, in April 2019, the U.S. Department of Justice published “Guidance Document: Evaluation of Corporate Compliance Programs,” which again emphasized the weight placed on company ethics and the “tone set at the top.” [3]

While the importance of ethics and values still applies, leaders also must ensure that their communication and actions project three other critical qualities, which one crisis manager has labeled the “Three C’s of Credibility”: competence, confidence, and compassion.[4] These Three C’s are especially important in times of crisis. In fact, the nature of the corporate culture can make the difference between a thriving organization and one that is beleaguered – and it all starts at the top!

Employees often interpret a soft tone set in executive offices as tacit corporate approval for them to assume more risks – sometimes crossing the line to actual fraud – despite the organization’s having a well-defined and clearly communicated risk appetite and risk tolerance. Now add in panic, which is defined as “sudden uncontrollable fear or anxiety, often causing wildly unthinking behavior,” and the risks escalate dramatically. In such circumstances, it’s easy to understand why the tone from the top must be elevated to the next level.

Establishing a strong control environment

A strong control environment is the cornerstone of a system of internal controls that supports the financial reporting oversight role of the audit committee. A sound tone from the top is an essential component of this effort.

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 the organization’s 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 to hire and retain qualified people.
  • A board of directors and audit committee that engage 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.
  • Assignment of authority and responsibility with well-defined roles that are appropriately segregated to prevent or detect error and fraud.
  • Human resource recruiting and retention policies and practices to ensure that human capital is valued.
  • Ways to identify internal differences, such as a forum or focus groups, to discuss differences of opinion between management and employees.

In any organization, the buck stops with the chief executive officer (CEO). He or she retains 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 messages, conduct, and other activities that affect factors related to the control environment and other components of internal control.

With all of this said, it’s important to remember this is not a “one and done” exercise.

Reworking the definition

Some years ago, compliance and white-collar crime attorney Mike Volkov wrote, “In reality, ‘tone-at-the-top’ is not really just tone-at-the top it is a lot more… Most people think that tone at the top is satisfied once the CEO puts out a statement of commitment to compliance.” But he goes on to argue that the real definition is much more complex.[5]

Volkov is right, the tone from the top involves a sound and repeated commitment from the board chairperson, 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. Also, tone from the top means this commitment is embraced, integrated and operationalized into every level of business operations.

Communicating the tone from the top

The proper tone from the top is critical. Still, it will dissipate fast unless there is a genuine and ongoing commitment from the board and senior leadership, including the chief compliance officer and the chief audit executive, to send the right message using various media, as well as actively building relationships throughout the organization one at a time.

Without the proper behavior of the board and senior leadership, including the right tone from the top, and without clear 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. This means the actual message from the top must be more than just, “We will comply with the law.” The message must be broader. Here’s an example:

“Our organization is sensitive to our circumstance and is committed to the highest ethical standards in every facet of our business, including our business practices, sales practices, legal counseling, human resource practices and treatment of employees and customers.”

Closing

Lastly, it’s worthwhile to point out that some of today’s best organizations make ethics a critical part of their corporate branding and core values. Why? Because doing the right thing, even when no one is watching, is profitable – this is called the “Ethical Premium.” Several studies have examined the correlation between organizational justness and performance, and the results show that those organizations with morals and ethics often outperform their competitors!

For those who like to read, we suggest “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 organizations should aspire to emulate and ultimately transcend.

 

Stay safe, and be well!
Jonathan Pic

Jonathan T. Marks

 

 

 

Attribution:

[1] Judson A. Brewer, M.D., “A Brain Hack to Break the Coronavirus Anxiety Cycle,” New York Times, April 1, 2020, https://www.nytimes.com/2020/03/13/well/mind/a-brain-hack-to-break-the-coronavirus-anxiety-cycle.html

[2] Cynthia A. Glassman, “Speech by SEC Commissioner: Sarbanes-Oxley and the Idea of ‘Good’ Governance,” U.S. Securities and Exchange Commission, September 27, 2002, https://www.sec.gov/news/speech/spch586.htm

[3] “Evaluation of Corporate Compliance Programs,” U.S. Department of Justice Criminal Division, April 2019, p. 10, https://www.justice.gov/criminal-fraud/page/file/937501/download

[4] Erik Bernstein, “Why You Need the 3 C’s of Credibility in Your Communications,” Bernstein Crisis Management online document, https://www.bernsteincrisismanagement.com/why-you-need-the-3-cs-of-credibility-in-your-communications/

[5] Mike Volkov, “How to Define ‘Tone-at-the-Top,” Volkov Law Group, September 30, 2012, https://blog.volkovlaw.com/2012/09/how-to-define-tone-at-the-top/

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