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The truth about “Tone from the Top”
Are your executives telling the truth when they say“ethics matter”?
FIFA protects the integrity of football and is fighting corruption in football. -FIFA Football Governance “The guardians of the game” 20 November 2014
We stand for respectable, honest actions in everyday business that are in accordance with rules... - The Volkswagen Group Code of Conduct Source: http://www.volkswagenag.com/content/vwcorp/content/en/the_group/compliance.html
The “Tone from the Top” at FIFA and Volkswagen share a common element What is it?
They are lying.
They are not alone.
Management or the CEO is involved in 53% of bribery cases; Senior executives know about 86% of corporate fraud cases
If you wanted to design an incubator for generating misconduct, it would look a lot like the C-Suite
What makes the C-Suite so susceptible to corruption?
Management readily sees cause and effect between bribery and sales
Companies that bribe have greater sales growth compared to control firms for 3 years before and 3 years after winning a major contract through bribery
But there are negative side effects of corruption
Companies that bribe have poorer net profit margin (net income divided by sales revenue) for the same 6 year period
Companies that bribe have poorer cumulative abnormal returns (difference between the sum of the monthly returns for bribing firms versus control firms) for the same 6 year period
Companies that bribe perform poorer on nearly every corporate metric used to measure success
If you endorse corruption to achieve a goal, you endorse corruption (full stop)
If you lie, your employees will lie
If you cheat, your employees will cheat
If you give bribes, your employees will take bribes
Tone from the top is not what you say, it’s what you do
81% of all frauds are perpetrated by at least one insider
5% of all revenues are lost due to occupational frauds
Companies are more often victims of corruption than beneficiaries
How can you change a culture of corruption?
Start changing traditional ethics training
When the big people get in trouble, the little people get ethics training.
Target the “big people” about how corruption causes internal fraud
CEOs are prone to viewing the company’s success as indistinguishable from their own.
When bribery hurts shareholder value it hurts the CEO
Use targeted motivators in your ethics training
Motivation: Shareholder Value & Exec. Mgmt; Career Opportunity & Middle Mgmt; Job Security & General Employee Base
How do whistleblowers help?
Whistleblowers are effective at discovering external fraud, and even more effective at discovering internal fraud
Discovering Internal Frauds
Median Losses After Discovery
Reduction in Median Losses with Effective Internal Controls
Whistleblowers are one of many internal controls that support an ethical culture that reduces internal corruption
An ethical culture that reduces internal corruption sustains a profitable culture
Sustained profits make your CEO a superhero
So your executives can tell the truth when they say “ethics matter”
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About the Author Background Eric Pesik is currently the Associate General Counsel and Compliance Officer for Seagate Singapore International Headquarters Pte Ltd. He also serves as an Adjunct Assistant Professor with the University at Buffalo, State University of New York, in the School of Management. He has been a lawyer since 1997 and is a member of the State Bar of California, USA. He is also admitted to the US Court of International Trade in New York and the US Supreme Court in Washington, DC. Many of Mr. Pesik’s presentations are available on SlideShare at: http://www.slideshare.net/ericpesik Disclaimer This work represents the opinions of the author alone, and is not the opinion his employer. Creative Commons Attribution License You are free to share, copy, distribute, and transmit this work; to remix or adapt this work; and to make commercial use of this work, under the condition that you must attribute this work to Eric Pesik (but not in any way that suggests that I endorse you or your use of this work). Each slide contains source attributions and URL; before reusing, you must obtain the original images from the original sources, and you must comply with any applicable license restrictions imposed by the original source. http://creativecommons.org/licenses/by/3.0/