ARTICLE

By: Ted Sugiyama, Former EVP, Kao Corporation

At the end of each year, a noted business magazine features a special section that looks back on corporate scandals. It is unfortunate that, for the year 2018, there were so many reports of scandals concerning otherwise reputable companies.

The compliance officers of many companies make their best effort to reduce the three factors of fraud risk, identified in “The Fraud Triangle” theory first proposed by American criminologist Donald R. Cressey. These three factors are the actor’s opportunity, motivation, and justification. The responsibility to prevent bad actors in this scenario is solely on the compliance officer and his or her ability to mitigate these factors effectively.

It is frequently stated by compliance leaders that the single most important factor in promoting compliance is the public commitment of the companies’ top executives, particularly the President or CEO. I agree. However, for the companies mentioned in these lists of scandals, public commitment to compliance by their senior executives was meaningless. Every one of them spoke about the importance of compliance to their employees and established a system to promote compliance. What went wrong? There was an inconsistency between words and actions.

The truth is that even a great leader is still human. After enough time, everyone will make the wrong decision. Someone who otherwise has integrity may have his or her head turned in the wrong direction when a major crisis strikes.

During these times, employees always look to the CEO, who must be responsible for his/her own words, and there must be no ambiguity. A CEO and executive team who cannot match their actions to their words will lose the trust of their employees. If during a crisis, leaders create ambiguity or inconsistency in their messaging, employees may use that as motivation to act improperly themselves. Clear, unwavering commitments to integrity from the top support a culture of compliance across a company.

To reinforce this culture of compliance the CEO needs to be surrounded by good board members, including independent directors and auditors, in order to maintain his or her unwavering commitment. When your organization finds itself in a crisis when a moment of instability occurs and he or she might be prepared to make a questionable decision, the board must be able to weigh in and protect the company’s values.

When deciding how to respond to a crisis, a company cannot weigh a negative impact on business performance against the degree of illegality. What the CEO has to protect is the trust placed in the company by society by complying with and protecting the rule of law.

Ben Heinemann, former General Counsel of GE, authored a book called The Inside Counsel Revolution, in which he emphasizes, “The company’s purpose is high performance with high integrity.”

The legal department is responsible to both the CEO as well as to the board of directors in many companies and has to provide the same information that the CEO holds to the board. In theory, the outcome of discussions by a full board of qualified directors with necessary and sufficient information should be the best one.

Notably, Heineman claims the company’s purpose is not high performance with high compliance, but with high integrity. The idea is to not only comply with laws and regulations but to aim for broader integrity.

Confucianism, which has a strong influence on Japanese thought, criticizes “hado,” or rule by force, and insists that “tokuji,” or a moral principle, should rule over the world by virtue. It is refreshing to read this parallel thought from Heineman, a citizen of the United States, who believes in integrity over compliance, just as Confucian thinking stresses moral principles overrule by force.

Society’s expectations for companies will become ever higher, and in response to ever-increasing expectations, the company must respond with greater and greater levels of integrity. Such a positive spiral will foster and maintain a healthy corporate culture of integrity.

Heineman argues in The Inside Counsel Revolution that the first question leaders must ask themselves when considering an action is not, “Is it legal?”  Rather, the ultimate question should be, “Is it right?” That contrast is the essence of integrity-based management.