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 ConductSource: http://www.volkswagenag.com/content/vwcorp/content/en/the_group/compliance.html

The “Tone from the Top” at FIFA and Volkswagen share a common elementWhat 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...

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

BackgroundEric 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

DisclaimerThis work represents the opinions of the author alone, and is not the opinion his employer.

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