DIERCKX & ASSOCIATES LTD

Introduction

character is doing the right thing when nobody’s looking.
There are too many people who think that the only thing that’s right is to get by, and the only thing that’s wrong is to get caught.
J.C. Watts

Being a critical citizen like me you will probably agree with me that it is almost common to find situations or incidents that erode your confidence in institutions. Regularly the media reports on yet another government official such as a politician, police officer, mayor, judge, or member of the management of a local or central government official that overstepped the boundaries. More recently we have seen the attention to use of perks and all kinds of compensations for Members of Parliament. Rightfully citizens require integrity of the actions of or politicians, and worryingly all too often the opposite is exposed. Professions that have traditionally been held in high esteem such as lawyers, doctors, accountants, brokers, pharmacists are also showing members who let their own personal interests prevail where the client’s interests should have been at the centre of their attention. It is no different in the corporate world. On a regular basis we see media reports on how corporations, companies, businesses are involved in fraud and corruption: selling unsuitable products, making false claims about products or business opportunities, negligent care of environmental obligations or responsibilities. The reputation and trustworthiness of the organisation is directly at stake in such instances.

We have a tendency to bring it all back to the ‘black sheep’ within an organisation. Integrity is a personal trait so when bad things happen it has to do with personal choices that harm the organisation. This to some extent reflected in laws even where the idea of “intent” of an organisation is deemed to be impossible so it will necessarily be brought back to the individuals behind unethical or even illegal behaviours. Integrity however, is not a trait that can only be attributed to individuals but also to organisations. Is it not true that we already judge organisations on their integrity; employees, consumers, shareholders and society as a whole, or stakeholder groups within society. There is a tendency to look at people in relation to integrity. It is in my view important to note that integrity is also a quality that can be attributed to the ‘system’ in which people function. Where the system is sick, anyone dealing with the system will ultimately be ‘infected.’ Where the integrity of persons is subject of attention, the integrity of the organization will also need to be taken into consideration.

With that said can one but conclude that integrity management is important for organizations?

Why Bother?

It’s easier to cope with a bad conscience than with a bad reputation.
Friedrich Nietzsche

One could say that any organisation gets the integrity issues or ethical issues it deserves. Considering that estimates from different parties such as the ACFE, PricewaterhouseCoopers and KPMG are that approximately one in two companies each year will be the victim of some form of fraud or asset misappropriation every year, there is room to suspect that more attention may be given to integrity management.  From a negative perspective I would say there is good reason to perhaps verify how the integrity within your own organisation may be improved to prevent damages from occurring. In practice this will almost certainly lead to a reduction in incidents such as incorrect (beefed up) expense declarations, leakage of company sensitive information, misappropriation of company assets, but also more alert reaction to outside threats.  From a more positive perspective there it also makes sense to invest in the integrity of your organisation. Success is highly dependent on the trust placed in your organisation by employees, shareholders, consumers and other stakeholders. Trust flows from acting with integrity. Corporate and political scandals as well as prosecutions and civil litigation in corporate failures have all contributed to ‘business ethics’ and ‘integrity management’ becoming an integral part of the management of organisations.

One cannot deny that trust is often rewarded. This is usually ingrained in relationships, with consumers, employees, shareholders and the societal environment. It is pretty hard to deny that businesses that do live up to their obligations by honouring their agreements, sell reliable products and/ or services, take matters such as the environment or social justice seriously enjoy a higher level of confidence.  Trust is an important matter, without trust, organisations cannot function, without the required levels of trust communities and societies would scatter into individual and non-cohesive collections of individuals. Business is no exception and should be seen as one of the many social forms we find in society at large. Protecting the trustworthiness of your organisation, internally and externally is therefore something to take serious. Your business life depends on it.  Several societal developments are of importance in relation to the question as to why integrity is important.

The disappearance of evident values, norms and social control
The last decennia or perhaps century have seen an ongoing process of secularisation and individualisation. Values and norms are no longer as evident as they used to be and as a result interaction is required to establish which values and norms are applicable in certain situations. Social controls especially the more informal types of social controls are for the most part no longer existent. As a result it is necessary to have compliance more explicitly addressed. The world has become a global village, business has gone global, more and more business processes are being outsourced and staff may well be situated on other continents where cultural backgrounds are substantially different. For a long time, multinationals have been face with the matter of whether or not to impose western standards or to adjust to local standards for instance in matters of child labour, employment conditions, reward systems and environmental issues.

Increase in organizational risks
Increasingly organizational processes become more complex and internationalized, for instance in the transport industry. Organizations do not always have a clear insight in all aspects of the logistical or value chains. Can you tell me what is happening exactly at your suppliers, sub-contractors, transport or IT services supplier? As a result organizations are exposed to more substantial risks. In addition there is a tendency to decentralize (management of) organizations. Through systems of delegated authority or power more and more members of organizations function with more autonomy. However, with autonomies come ‘seductions.’ More and more, organizations become dependent on the knowledge, skills, qualities but also intentions of their members/employees. The paradigm of ‘command and control’ is less and less used (and for the better I would like to add). Employees are occupied and made responsible for increasingly larger transactions.

Accountability and Good Corporate Citizenship
More and more people and societal interest groups are concerned with the power of government and business and are calling – often supported by the media – for greater transparency and accountability. Environmental groups, human rights groups, consumer advocacy groups and organizations but also employees and shareholders have become more informed and critical. These groups ask or even demand of the organization that it is involved in matters of good corporate citizenship (environmental and social responsibility) and that they are prepared to be accountable on those matters. Choices made by employees and the market are more often directed to a larger or lesser extent by ethical, environmental and social justice considerations.

Liberalization and Privatization
Exceptions taken, there is a general tendency to move away from the model of the nanny state towards liberalization and an appeal to individual responsibility, societal involvement and self-regulation of industries. As a result interest groups are less and less pointing their focus on the government and more and more on the businesses and organizations themselves.

The fraud Prevention Perspective

Preventing fraud is considered still the most cost-effective way to reduce losses from fraud. And the losses of fraud are substantial. On average 7% of the revenues of companies are lost on fraudulent activities, for the large part perpetrated by employees. Businesses by now have an almost one in two change to become a victim of fraud every year. Fraud prevention involves two core and fundamental activities:

• Creating and maintaining an environment that promotes a culture of honesty and integrity;
• Assessing the risk of fraud and developing concrete and appropriate responses to mitigate the risk.

Albrecht & Albrecht in “Fraud Examination and Prevention” distinguish at least five ways to create such a culture:

• Insisting that top management model appropriate behaviour;
• Hiring the right employees;
• Communicate expectations throughout the organisation and requiring periodic written confirmation of acceptance of these expectations;
• Creating a positive work environment; and
• Developing and maintaining effective policies for punishing perpetrators once fraud occurs.

The third point “communicating expectations” refers to the code of conduct or corporate code. Like me, they point out the importance that codes of conduct, even though they often are already there in an unwritten form, need to be in writing and communicated to all relevant stakeholders. (employees, vendors and suppliers, but I could also imagine the relevance to for instance shareholders and even the public.)

Integrity: a quality of of persons AND organisations

“Causes of unethical actions are not simply the result of
rotten apples in the corporate barrel”
WM Hoffman 1990.

Integrity is in the first place a personal quality. Integrity as a personal quality refers to:

• Awareness of values and norms;
• Having an eye and respect for the interests of others;
• Being not impeachable: you do not set aside your values and norms because it suits your acute interests;
• Consistency and transparency in words and actions: “we do what we say and we say what we do”.

Besides being a personal quality, integrity is also a quality of organisations. When we speak of an organisation of integrity, we refer to an organisation that sets values and norms for itself and carefully considers the interests of ‘stakeholders’ in its actions. In some instances we see this translated into such expressions as a good corporate citizen (for instance when referring to environmental responsibility, matters of social justice and community support).

Where exactly or what exactly is this organisational integrity?

The integrity of an organisation is the resultant of the decisions and actions of the individual members of that organisation. NOT THE SUM, NOT THE AVERAGE! As a result members of the organisation may be ‘integrity builders’ or ‘integrity destroyers.’ Individual decisions and actions are attributed to the organisation. In that sense every member of the organisation functions as an ‘ambassador’ for his or her organisation. Any judgment of the individual’s is automatically a judgment of the organisation. There is a natural tendency to attribute irregular/unethical behaviour of the organisation to its individual members: ‘the rotten apples’, ‘the black sheep.’ By putting the monkey on the individual’s shoulder soley , the organisational responsibility could easily be neglected. It is short sighted to throw any misdeeds as per definition in the lap of individual members; the organisation or organisational environment may well have been a contributing factor. Did the organisation do enough to create an environment of honesty and integrity?

At all times the potential causes of certain unethical actions will need to be investigated and established. Using the metaphor of the rotten apples again, new rotten apples keep on appearing without anyone asking how this can be. The causes of the rot are not investigated let alone addressed. What is left is nothing more than fighting the symptoms. It is like taking a ‘Neurofen’ to ease the pain of a hernia. You may not feel the pain (symptom) for the time being but it does nothing to cure you from your hernia.

Seven Dimensions of Organisational Integrity

Organisational integrity is not just realised by placing faith in the good intentions of the members of the organisation; the individuals. It is at all times required that management finds the means and resources to stimulate responsible behaviour and discourages irresponsible behaviour. This management task is what is referred to as ‘INTEGRITY MANAGEMENT’.  Integrity management is focussed on the development and enforcement of the integrity of the organisation. Integrity management revolves around the following seven dimensions:

• CLARITY: ensuring that it is clear for all individual members of the organisation what the expectations are, what it tolerated and what not.
• CONSISTENCY: ‘the tone is set at the top’. Management has an important role in showcasing the desired behaviour of the other members.
• EXECUTABILITY: where goals, targets and demands are set they need to be realistic and achievable.
• COMMITMENT: there needs to be an appropriate level of commitment (top-down and bottom-up) to establishing responsibilities.
• VISIBILITY: is there an appropriate level of visibility of individual behaviour.
• COMMUNICATION: integrity/ethical dilemmas happen wherever people live, play and work. It is important that where such dilemmas arise that there is a low threshold to throw them out in the open and discuss them.
• ACCOUNTABILITY: this refers to internal social control within the organisation. Can members be held accountable for their actions? Is appropriate behaviour and inappropriate behaviour adequately appreciated, rewarded respectively sanctioned?

Three Central Questions of Integrity Management

Integrity management  requires an organised approach. In essence boils it boils down to three questions in relation to the previous seven dimensions of organisational integrity:

• What is the (f)actual situation in my organisation? ( The so called ‘IST’ position)
• What is the desired situation for my organisation? (The ‘SOLLEN’ position)
• How can the organisation get from actual situation to the desired situation?

The questions seem simple but as is often the case with seemingly simple questions, they  bear a wealth of information and additional questions behind them. Such as how do we establish the desired situation? How do we establish the current situation? Can we actually measure integrity, it seems such an immeasurable quality?

This is where Dierckx & Associates comes in. Would you like to get from where you are to where you want to be? Contact us.

This article is derived from an upcoming publication on integrity management by the author. Come back soon to find out when the publication will be available.

Filed under: FRAUD PREVENTION, INTEGRITY MANAGEMENT, RISK MANAGEMENT