A recent study of ethics at U.S. Fortune 500 companies holds good news and bad news for compliance officers: Employees are more willing than ever to report wrongdoing, but levels of misconduct and whistleblower retaliation remain high.
Among the top findings of the survey is that larger companies experienced more misconduct, despite better systems to prevent it. According to the National Business Ethics Survey conducted recently by the Ethics Resource Center, 52 percent of more than 2,100 employees at U.S.-based companies with annual revenues of $5 billion or more said they had observed misconduct in the last year, compared to 45 percent of those surveyed at companies of all sizes who said they did.
Employees at larger companies were also more likely to report wrongdoing. Of the Fortune 500 respondents who witnessed misconduct, 74 percent reported what they witnessed, compared to 65 percent who did at companies of all sizes.
The study also looked at whether greater public scrutiny and pressures from quarterly earnings at large, publicly traded companies resulted in more misconduct. “We found that the more employees are aware of earnings and pressure around earnings within a company, the more likely they feel pressure to compromise standards in their organizations,” says Patricia Harned, president of the Ethics Resource Center. In fact, at the Fortune 500 companies, 16 percent of those surveyed said they felt pressure to break the rules, compared to 13 percent at all companies surveyed.
While pressure to make earnings could result in more misconduct, there are also simply more opportunities to commit fraud at bigger companies, say the study's authors. “The reality is that in larger organizations, from an internal control standpoint, there are more nooks and crannies, where it is easier for people to orchestrate an act of misconduct,” says Tim Mazur, chief operating officer of the Ethics and Compliance Officer Association.
Among the most common forms of misconduct at Fortune 500 companies were: conducting personal business on company time (29 percent), abusive behavior (22 percent), and lying to employees (21 percent.)
The ERC survey also seems to contest the conventional wisdom that as the economy worsens, misconduct increases and then declines as the economy improves. “Historically, our members have seen higher rates of reported misconduct when the economy gets worse,” says Mazur. Yet, misconduct is rising even as the economy improves, although the slow pace and unevenness of the recovery might be influencing the results.
Harned says the study finding may be due to senior leaders making it a point to do a better job to uphold ethics and culture to weather difficult economic times.
Jason Mefford, president of advisory firm Mefford Associates and former head of internal audit at Ventura Foods, says he believes the reasons are more complex than that. In a down economy, monitoring functions like compliance and internal audit—people responsible for finding the misconduct—are the first to get budget cuts. “You can still have the same level of misconduct throughout, but if the people aren't there to notice it and catch it because of budget cuts, the issue is not going to come up,” he says.
“We found that the more employees are aware of earnings and pressure around earnings within a company, the more likely they feel pressure to compromise standards in their organizations.”
—Patricia Harned,
President,
Ethics Resource Center
Another reason for misconduct declining in a weak economy may be due to fewer reports of misconduct. According to the study, the two greatest sources of pressure employees feel is keeping their job and meeting their personal financial obligations. “A lot of people, especially with the down economy, are concerned about their jobs and don't want to rock the boat,” says Mefford.
Internal Reporting
Another piece of good news for compliance officers is that employees appear to be reporting misconduct internally, despite concerns that the whistleblower provisions of the Dodd-Frank Act would encourage employees to bring their concerns to regulators first. According to the survey, 60 percent of Fortune 500 employees initially reported misconduct to their supervisor; 21 percent turned to upper management first; and 11 percent reported to a hotline. Just 1 percent of Fortune 500 employees made their first report to the government or other external authority.
The study also found that more employees in Fortune 500 companies use help lines to report misconduct—11 percent compared to 5 percent across U.S. companies overall. According to Harned, while the results are better for big companies, the lessons are the same: If senior management is banking on hotline numbers to be an indication of what the issues are in the company, they are missing about 95 percent of reports, she says.
KEEPING QUIET
The following chart from the Ethics Resource Center survey reveals why employees do not report the misconduct they observe.
The Reason
Percent of Respondents
Believed no corrective action would take place
62%
Not confidential
42%
Fear of retaliation from coworkers
29%
Already addressed by someone else
28%
Fear top management retaliation
28%
Resolved issue myself
28%
Fear of retaliation from supervisor
25%
Would have to report to person involved
25%
Someone else would report it
23%
Not know whom to contact
15%
Past experience of retaliation
14%
Source: Ethics Resource Center.
The findings emphasize the importance of maintaining a strong ethical culture that fosters employee reporting of misconduct. And the results underscore the need for companies to foster an environment where employees feel comfortable bringing concerns to managers and supervisors. “It is still the case that employees are far more likely to go to their supervisor or someone else in management to report misconduct,” says Harned. Companies should ensure they have a system in place for supervisors or mangers to notify upper-management if they receive a report of misconduct, he says.
Furthermore, employees are far more likely to commit fraud in situations where employees perceive that management is not committed to a strong ethical culture. Misconduct soared from 48 percent in companies where management has a very strong ethics commitment to 89 percent where management's commitment was weakest.
Companies also need to work on further implementing their reward systems. Only 50 percent of respondents felt that ethical conduct was rewarded by their employers, and nearly 30 percent believe their company rewards results that were attained through questionable means.
The study also revealed that employees need more information on—and reassurance about—the reporting process, should they ever have to raise a concern about wrongdoing. Forty-two percent of employees who observed misconduct and chose not to report it cited doubts about the confidentiality of the process, and 15 percent of those who chose not to report said it was because they did not know who to contact.
A company can have an ethics code and the verbal support of senior management, standing up and saying they believe in doing the right thing all the time, “but then the minute that something comes up and they're not true to the promises that were made, it just washes everything away,” says Mefford. “The companies that do well at protecting the people who speak up are the ones that are going to have the strongest ethical cultures overall.”
Mazur agrees. “If there's some effort made, some element of respect for the employees, than the employees are much more likely to show respect back to the organization.”
No comments yet