Effective compliance and ethics program as a practical tool in your internal governance


Another way to make yourself more attractive for foreign investments and strategic partnerships

Companies with effective compliance and ethics program are able to create and nurture better ethical culture, one of the proven business performance drivers. Various research made by Ethics resource centre (ERC) and Ethisphere had shown that organizations with strong culture of integrity have higher profitability up to 20%, lower labour costs by 12% and 5.8% higher shareholders’ return. Such organizations also have employees who are more engaged and committed. Customers and investors increasingly seek companies whom they believe behave ethically, as the 2015 Aflac Corporate Social Responsibility Survey showed (Salmon Byrne, Culture Matters: The Advantages of a Strong Ethical Culture are Manifold).

Picture 1: Performance indicators comparison between ‘World’s Most Ethical Companies’ (WME) and average companies from S&P 500, Source: The Network

In early 90-s the US authorities have issued US Sentencing guidelines for organizations, of which in chapter eight there is a definition of an effective compliance and ethics program. The companies which are able to demonstrate that they have such program in place, can drastically lower penalties in case of incidents. In such cases, authorities can even give up on prosecuting the organization and narrow it only to individuals in question. This has been the major driver for companies in US to invest in compliance and ethics programs. It had later spread throughout developed markets as a seven elements model. Additionally the rigorous enforcement of US Foreign Corrupt Practices Act (FCPA) pressured US companies to force the same standards to their business partners worldwide. In recent decade, we can see this kind of trends in many European countries, such as UK, Germany and most of the North countries. In Adria region the same trend is arriving with some delay, however EU regulation had made compliance function obligatory for financial sector. We can also see through various international corporate governance documents how business ethics and standards of good corporate behaviour is getting its seat at the big table.Companies in Adria region, especially those from EU member states, are suddenly faced with increased expectations for having an effective compliance and ethics program according to international standards and best practices. Business partners and investors from abroad are seeking for partners that can demonstrate their ability to manage compliance requirements and behave ethically. Namely because these are much less risky and thus les costly.

Numerous corporate scandals clearly demonstrate how high is the cost of these kind of risks being let loose. Not just Siemens corruption scandal, which costed the company and its investors billions of Euros from 2006 onwards, not just Volkswagen fraud scandal, which is still costing the company unimaginable sums of Euros of  compensations, management layoffs, vast regulatory and moral scrutiny and loss of entire market potential in the US; Not only recent Uber regulatory fraud, sexual harassment, intellectual property theft, personal data loss scandal…, we also have intriguing regional stories. In 2011 German phone company Deutsche Telekom AG and a Hungarian unit had to pay more than $95 million to settle U.S. criminal and civil probes for bribing government officials in Macedonia and Montenegro (Stempel, Reuters, Deutsche Telekom in $95 million bribery settlement, 2011). The investigation had shown that Magyar Telecom had channelled millions of euros to Macedonian and Montenegro officials under sham consulting and marketing contracts to help them win business over competitors and to help Magyar Telecom buy the state-owned phone company on better terms. While the most recent Agrokor scandal had brought us our region’s own Enron. The last is known for the major accounting fraud, conflict of interests and corruption carousel, company’s close relationship with the White house, allowing it to operate free from US government scrutiny… In the end, Enron collapsed entirely, leaving thousands of employees without their jobs, investors without their savings and corporate CEO imprisoned.

There are of course less dramatic and more every-day business consequences for companies for not having an effective compliance and ethics program. But even those can badly hurt your business and your reputation. You could lose the deal with foreign partner or end up paying them compensations for example, you could be rating lower in international tenders, or be faced with major administrative burden in due diligence or regulatory procedures; you could also lose financial resources from international financial institutions (in worse cases even be blacklisted). On the other hand, when you can demonstrate that you have an effective compliance and ethics program in place, you instantly differentiate from your competitors in Croatia and the region. Whenever investors would be choosing between similar projects, they will pick the one, which will also prove to be more safe from compliance and ethics risks perspective.

In order to make yourself more attractive for foreign investments and strategic partnerships in this respect, you should implement all elements of an effective compliance and ethics program. Best if you look up at latest international standards, such as ISO 19600, Compliance Management Systems and ISO 37001, Anti-Bribery Management Systems. You will certainly excel as a desirable partner (and also sleep better), if you would implement the following framework:

  1. Strongly and visibly commit to legal and ethical ways of your business operations at the top and middle management level – communicate this commitment on various meetings, with top and middle management personal example, in the rewarding practices and promotions;
  2. Have your compliance and ethics obligations identified;
  3. Nominate compliance and ethics officer, as a senior manager and an independent function;
  4. Write your Compliance and Anti-Bribery Policy, Guidelines and Rule-books;
  5. Compose your Code of Conduct with measures to apply in practice, top down and bottom up;
  6. Communicate and educate employees, by relevance for their job responsibilities and practical application of compliance requirements, values and standards of behaviour;
  7. Establish the compliance and ethics helpline to serve employees for consultation and early warning purposes (beware of privacy data requirements);
  8. Protect employees from retaliation for reporting compliance and ethics concerns;
  9. Assess and actively manage your corruption and other compliance and ethics risks – organizational, processes, group and third parties – wide;
  10. Have your key employees and candidates for key positions assessed not only by knowledge, skills and experiences, but also by personal reputation and conflict of interests;
  11. Establish your third party compliance and ethics risk management;
  12. Make sure to early detect, investigate and discipline for non-compliance and ethical breaches currently, fairly and consistently;
  13. Integrate incentives for good behaviour into your business performance metrics – nothing communicates better what the company cherishes most and nothing is driving employees better than objectives for which they are rewarded and praised.

Andrijana Bergant