Business leaders are in the spotlight more now than ever before due to a combination of tightening legislation and enhanced transparency. How can organisations stay a step ahead, and make sure they’re aware of potential risks before they develop into full-blown problems that can have serious financial and reputational repercussions?
RecentPwC research has shown that the number of CEO dismissals for ethical reasons rose by 36% from the period 2007-2011 to 2012-2016. But despite this seemingly worrying increase, it’s unlikely that corporate leaders have actually become less ethical.
Instead, the rise is attributable to a combination of more proactive legislation, always-on media and communication channels, and a less forgiving public.As a result, poor behaviour is more likely to come to light, and it’s increasingly difficult for companies to keep an executive in post once an ethical lapse has been exposed. A company’s digital footprint can often provide undeniable evidence of misconduct.
When it comes to increased corporate responsibility, the UK is following in the US’s footsteps. The US government has been pushing businesses to crack down on executive bad behaviour for some time, with legislation like the Sarbanes-Oxley Act and the Dodd-Frank Act aiming to increase corporate responsibility and protect whistleblowers, and UK legislation isn’t far behind.
The Criminal Finances Act, which came into effect this year, introduces the new corporate criminal offences of failing to prevent the facilitation of UK and foreign tax evasion. This means that a company can be held responsible for failing to prevent an employee, agent or any other person performing services for the company from facilitating tax evasion. The potential fine is unlimited, and the only defence is that the company had reasonable prevention measures in place. This is a particular headache for companies with complicated global supply chains.
The Senior Managers Regime, meanwhile, increases the individual accountability of senior financial services executives, requiring them to take reasonable steps to prevent regulatory breaches in their area of responsibility from occurring or continuing to occur.
In this corporate environment, bosses are under more pressure than ever before. Leaders need to have a handle on what’s happening throughout their organisation and also their supply chain. The risks for letting something slip are severe, ranging from significant fines and reputational damage to personal prosecution and even jail time.
However, the very technology and communication channels that are helping to highlight corporate ethical lapses can also be leveraged by companies to detect and deal with potential issues before they develop into serious problems.
What businesses can do to avoid breaches
Old risk management tools and techniques aren’t sufficient any more, and important signals of risk are often buried in mountains of inaccessible information. Leaders need access to the right technologies so they can detect and analyse risks from the vast amounts of available data, including unstructured data embedded online and in social media. The right solutions bring artificial intelligence and big data analytics to bear on this universe of conversation to identify weak signals and early warning of specific risks associated with key assets across an entire value chain, from suppliers to vendors, stakeholders or an entire sector.
A.I. empowered risk management solutions will give business leaders rapidly accessible and intuitive intelligence about their whole value chain in real time, to enable greater foresight to challenges and more timely and effective interventions.
As well as having platforms in place that can detect potential risks, organisations need to put processes in place to deal with the warnings and insights they receive. This may involve developing contingency plans and data-driven approaches to crisis decision-making and communications as well as broader reputation and issues management
As important as technology is for risk management, it’s also crucial for companies to ensure that ethical behaviour is embedded in the company culture, and that it’s role-modelled by the senior management team. A company’s approach to ethics and regulation can’t exist solely in static written documents and policies, but must actively lived in strategy, planning, recruitment, training, corporate communications and employee targets and incentives. Companies that get caught in ethical lapses often prioritise financial targets over all else, creating a corporate culture that works against employees speaking up to deliver bad news or flag ethical issues. When the worst happens, the damage to a company’s reputation and licence to operate can be equivalent to a third of its value or more.
To stay on the right side of the regulators and to ensure a reputation that is well in the black, organisations need to make use of cutting-edge technology and ensure that ethical behaviour is part of company culture. Nowhere is this more important than in the highly regulated financial services sector upon whose well-being so much of society depends.