Whatever your role in your company—be it director, CEO, or senior executive—you’ve undoubtedly heard a great deal about the need for your company to set the right “tone at the top.” But what is the “right” tone? Well, that’s usually easier to identify than articulate; the answer to the question is similar to the oft-paraphrased 1964 indecency opinion provided by U.S. Supreme Court Justice Potter Stewart, who said that we can’t define pornography, but we know it when we see it.
Trying to define the “right” tone at the top presents a similar challenge. For purposes of this discussion, let’s say the right tone involves a shared set of attitudes where employees maintain high ethical values and act with integrity, thereby complying with laws and regulations, and behaving in a principled manner. Having the “right” tone in an organization makes sense intuitively, and for a number of other important reasons as well.
The Rules
Among the most important reasons is that companies are subject to myriad laws and regulations, and compliance with those edicts rests on the behavior of the workforce. Specifically, as you know so very well, The Sarbanes-Oxley Act of 2002 requires public companies to have implemented specified elements of a legal compliance program, including a code of conduct and whistleblower channel. And when companies report on the effectiveness of their system of internal control over financial reporting, they’re utilizing the internal control framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, which sets forth the tone at the top as an integral part of the “control environment.”
Stock exchange listing standards also require attention to compliance, where, for example, the New York Stock Exchange mandates a code of business conduct and ethics. Note that here, as with the COSO control environment, we’re talking about not only compliance with laws and regulations, but ethical conduct as well.
Additionally, there are relevant guidelines, including the widely-read memo of Department of Justice Deputy Attorney General Thompson, which sets forth principles for federal prosecutors in deciding whether to seek criminal charges against a company (click here for a copy of “The Thompson Memo”). This so-called “carrot and stick” approach is similar to that being taken by the Securities and Exchange Commission, also with focus on a company’s compliance-related programs. In addition, the U.S. Sentencing Commission recently amended its organizational sentencing guidelines, with clear focus on compliance programs being a key factor in making sentencing decisions.
Setting The Tone
Most public companies have adopted the required codes of conduct and whistleblower mechanisms, but some are going further through establishment of more comprehensive compliance programs, involving the deployment of company-wide training programs, the creation of “help lines,” and the appointment of compliance and ethics officers. Some have adopted means of obtaining feedback on program effectiveness, and many have extended the programs to deal not just with legal and regulatory compliance, but with integrity and ethical values as well.
To further enhance the substance and effectiveness of compliance programs, the chief executives of many companies are communicating messages about the importance of the programs. And boards of directors are recognizing their important role in providing the requisite oversight, and their audit committees are carrying out their oversight role as mandated by Sarbanes-Oxley.
These efforts, carried out substantively and conscientiously, have a positive effect on a company’s tone at the top, which in turn affects the entirety of the organization. But, stepping back a moment, how many executives and directors really know what “tone” actually exists in their company?
The fact is, most individuals in an organization believe they have a pretty good idea of what the “tone” is in their company. Whether that view is truly shared, however, often is debatable. But experience shows that even when there is a shared view of the company’s “tone,” it’s not always clear how the tone got to be what it is.
There’s no doubt that the type of compliance and ethics programs mandated or suggested, as mentioned above, are important elements in establishment of the tone. But in the companies I’ve dealt with directly—as well as others I’ve discussed with colleagues—there’s one factor that is far and away most critical: That the tone at the top is established first and foremost by the actions of top management, and most specifically, the CEO. This view is supported by the COSO internal control framework, which states that—while acknowledging that the tone is influenced significantly by an entity’s board of directors—the CEO, more than any other individual, sets the tone at the top that affects integrity, ethics, and other elements of a positive control environment.
The Key Element
If we accept that the CEO sets the tone in an organization, what can he or she do to get it right; that is, what can the chief executive do to ensure that an organization’s people operate with integrity and high ethical values?
The answer to this complex question is rather simple. We find there is one main driver: the CEO’s actions. The old adage, “actions speak louder than words,” is amazingly true in the corporate world. What the chief executive does, especially in making difficult decisions, drives what his direct reports will do, and what their reports will do, and so on down the line.
Here are two examples from personal experience.
In one, the chairman and chief executive of a major services firm was confronted with a problem: The leader of a significant and profitable business unit was arguing against the promotion of a female manager, who undoubtedly was ready for promotion. Upon investigation, a clear pattern of anti-female bias on the leader’s part became evident. The chief executive called a meeting of his senior executives, where several argued that the unit was doing well, and no action was necessary. One or two others weren’t so sure. After lengthy discussion the chief executive asked one final question: “What is the right thing to do?” The answer was clear to all, and shortly thereafter the CEO removed the unit’s leader, and the female manager was promoted. Perhaps most importantly, within weeks this decision—which, by the way, was made with only a handful of staffers present behind closed doors—became known to virtually every manager in the company. The tone of “doing the right thing” had been set in concrete.
The second example, which has an interesting twist, involves the chief executive of a major financial institution. The CEO learned that under a new regulation, certain call center employees needed to become “state-licensed” if they were to continue to be paid on a commission basis. Eager to do the right thing, the CEO issued a memo mandating that all call center personnel must immediately begin the licensing process, and anyone not obtaining the license within three months would be removed from commission pay, which happened to be a highly-desirable compensation mechanism.
In this case, the executive fully believed he had done the right thing; after all, the law must be complied with, and there were to be no exceptions. Unfortunately, employees heard a very different and unintended message; namely, that it’s okay to break the law for a short period, until compliance is achieved. Upon seeing the light, the CEO issued a new directive that call center employees still must move quickly towards licensure, but in the interim they would be paid on a fixed basis (based on an average of past pay). Here, the CEO learned the hard way that the intended message isn’t always the one that gets communicated.
Why It Matters
Of course, having the right tone at the top is necessary to comply with the spirit—if not the letter—of laws and regulations. And I believe the vast majority of chief executives and boards want their company’s people to do the right thing. And, certainly, they’ve seen what can happen to a company’s reputation when its employees behave unethically or illegally, resulting in damaged reputations and—in some case—in damaged or destroyed businesses.
But in looking further behind the curtain, one can see that there are additional benefits to instilling the “right” tone. Companies acting with integrity and maintaining high ethical values are well-respected in the marketplace. Consider companies that are judged great places to work; these companies typically attract, recruit and retain the best people. And they’re also the companies with which other firms want to do business, often attracting the best customers, suppliers and business partners. Testing the veracity of that claim is not difficult—one needs only reflect on the real cost of replacing a string of valued personnel or customers.
Making Sure It’s Right
Ensuring one’s company has the “right” tone can be difficult, in part because it’s such an intangible. And in large organizations with disparate and far-flung operations, there can be multiple “tones.”
Indeed, this is an area with which management, auditors, and audit committees have struggled, especially as they assess the “control environment” as part of the Sarbanes-Oxley Section 404 work. The tone at the top involves what some call “soft controls,” and getting one’s arms around them can be a challenge.
One approach that a number of companies use involves conducting a survey of employees. Done electronically, all levels of personnel are surveyed on an anonymous basis about the messages they have received from their business unit leaders and senior management. The surveys address ethical values exhibited by management, employees’ comfort with whistleblower channels, etc. These survey results have proven extremely valuable in understanding what the tone really is at the company, and whether there are wide-spread or localized issues that need to be addressed.
Having the desired tone at the top is critically important, especially because it has such a pervasive impact on a business: its people, operations, and performance. Recognizing its relevance, and knowing how it’s established, is fundamental to getting it right.
The column solely reflects the views of its author, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.
What did you think of this column? If you'd like to react or respond, we urge you to write a letter to the editor.
No comments yet