What Is Corporate Misbehavior and How Can Boards Reduce It

Corporate misbehaviors are intentional behaviors of employees potentially harmful to the organization or the individuals within it.

Some examples of these are fraudulent statements, accounting fraud, pump-and-dump schemes, insider trading, Foreign Corrupt Practices Act (FCPA) violations, and conflicts of interest. 

These actions, suggestive of an unethical corporate culture, resulted in billions of dollars in company and shareholder losses. Hence, corporate boards must prevent corporate misbehaviors at all costs.

But how do they do it? 

Here’s Harvard’s comprehensive ten-step program to reducing corporate misbehaviors: 

1) Designate A Committee of Non-Exec Directors 

The board should establish an ethics committee, but to avoid diffusion of responsibility, they should be composed of non-executive directors.

They’re generally responsible for a company’s culture of integrity.

Such delegations include committees for ethics and compliance, audit, and ad-hoc (i.e., in charge of addressing evolving risks and challenges).

All must create a robust program of processes and controls to promote ethical compliance and conduct.

2) Appoint A Chief Ethics And Compliance Officer

A chief ethics and compliance officer (CECO) deals with a firm’s daily operational responsibilities to the global ethics and compliance program. A CECO must know about unethical behavior’s science, ethical theory, and applicable laws.

The CECO has access to firmwide information on disciplinary actions and authority over all the local compliance officers. He must also regularly chair a cross-functional, multi-disciplinary management team that reviews a company’s procedures and policies. 

3) Craft Online Mission Statements and Codes of Conduct 

These ethical and compliance standards and procedures are necessary to help detect, prevent, and remedy unethical and illegal conduct in a firm.

They should be company-specific (i.e., based on a firm’s core values, standards, and procedures). 

They must also be simple to read and contain straightforward, relatable, and authentic examples that resonate with employees so they can easily understand them.

If necessary, reiterate them creatively and continuously to meet changing conditions in the marketplace.

4) Establish Clear Escalation Policies

Product quality and workplace safety are defined by the leadership’s response to the issues brought to their attention. This usually starts on the production floor.

Hence, the board must ensure a company has a clear escalation policy on different issues.

For example, there must be clear guidance on what matters can be dealt with at a local plant level or which should be surfaced to others higher in the organization.

5) Incentivise Ethics

Develop integrity performance indicators. These include absenteeism, customer and employee complaints, and misuse or stealing of company assets. These don’t only establish and enforce best practices but also benchmark a firm’s program and results.

Be sure to reward employees with good behavior. However, avoid creating misaligned incentives. Otherwise, the espoused values and codes established by the firm will be meaningless. 

Employee rewards can be in the form of monetary benefits or improving employees’ benefits experience.

Take pos health insurance as an example. The pos insurance definition may be similar to HMO and PPO insurance plans, except it’s more flexible and affordable.

This is an excellent choice for employees who want to cut costs and don’t anticipate out-of-network services. 

6) Hire C-Suite Executives with Due Care 

Directors must perform thorough background checks on the candidates they appoint to run the business.

These include their networks, conflicts of interest, and criminal history. Tapping on executive search firms for more candid assessments can also help. 

Directors should also ensure that the candidates are competent and of high moral character. They should at least have these four qualities: responsibility, integrity, compassion, and forgiveness. 

7) Require Interactive Training

Besides establishing ethical and compliance standards, communicate them to all board members and employees through a well-designed training program.

Include topics like how the company makes money, business laws, and the science of unethical behaviors. 

Provide actual cases to allow participants to internalize the codes, practice addressing risk areas, and exercise good judgment. This will be spearheaded by the CECO. 

8) Encourage Employees to Speak Up

One of the reasons why concerns aren’t reported is due to the fear of retaliation.

The board must ensure that the board has a robust non-retaliation policy and a well-publicized reporting system. Consider rewarding employees who report ethical and compliance concerns with stewardship awards or financial incentives.

9) Implement Rules Equally

The board must ensure that the firm responds appropriately to all misbehaviors, regardless of the offender’s rank, contributions to the company, and economic performance. This helps improve organizational justice (i.e., worker’s perception of fairness in a company). 

The CECO and general counsel will ensure rules are enforced evenly across the organization. 

10) Have Contingency Plans for Compliance Failures

Compliance failures are considered “predictable surprises.” The board must have already prepared to stop an offense and the damages it’ll cause.

These include when to reach out to internal and external players, such as public relations (PR), social media experts, the press, and even government relations personnel. 

Suppose there are no contingency plans in place. In that case, the board should be flexible enough to modify their compliance and ethics program, ensuring no similar and further offenses will occur in the firm. 

Final Thoughts

The board should be more proactive to corporate misbehaviors.

They should avoid presuming everything’s fine unless they hear otherwise. Instead, they must be probing in reinforcing ethical conduct as a core value and winning with integrity.