Blind curve or ahead of the curve?

By

Tobias Schumacher

EY Global Sector Leader for Advanced Manufacturing & Mobility, Forensic & Integrity Services

Working on forensic investigations and consulting projects since 1998. 14 years with EY.

7 minute read 25 May 2019

An Integrity Agenda could help Automotive organizations navigate today’s complex regulatory legal and business environment.

Like other industries, the automotive sector is going through a rapid transformation. With the scale and impact of its technological innovation, complex global supply chains, increased environmental concerns and increasingly protectionist trade practices, many organizations in the sector are finding they must rethink their approach. Organizations now have to traverse an ever-shifting landscape of pre-existing and emerging risk.

While compliance failures can have a negative commercial impact and increase the need to redesign market strategies, a well-designed and fully integrated compliance program can create strong defense mechanisms against prosecution along with mitigating risks. With competitors facing similar issues, this can potentially offer a competitive edge if others are lagging in transparency and integrity. It pays to be well-behaved.

Yet for any sector, navigating today’s landscape of current and emerging risk requires more than just a focus on compliance alone. To stay ahead of the curve, an organization must assess its existing compliance framework from an ethical standpoint. Organizations should also identify the gaps between intentions and the actual behavior of its employees across the entire organization, as well as the broad spectrum of future risk factors involved in the entire production process – from R&D to sourcing, manufacturing, distribution, and even customer relations.

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Chapter 1

Seeing the bigger picture of risk

Mitigating compliance risk is about more than spotting red flags

Recent cases of fraud and corruption have resulted in the market and reputational repercussions for the entire automotive sector. The diesel emissions scandal sparked environmental concerns around the long-term future of diesel-powered vehicles and earned the companies involved large fines and legal costs – and has led to closer scrutiny of governance and business practices in the industry. Investigations into allegations of cartel-like behaviors – where automotive firms are alleged to have worked together to delay the introduction of emissions technologies – have followed, hitting share prices and confirming the industry is still in the spotlight.

When the trustworthiness and values upon which a sector rests are called into question by society at large, the effects can be far-reaching: reduced revenues increased costs and depressed share prices, as well as tougher regulations, and fresh financial, legal and ethical considerations that can restrict R&D.

The impact of regulation can be equally far-reaching. While the EU’s GDPR legislation has received much attention for its implications for data privacy, the US Department of Justice’s increased fraud and corruption enforcement capabilities have received less attention. Even if an organization isn’t prosecuted in the country where the offense took place, it’s likely the long arm of US law will reach them. Due to the global nature of their business, they may not fully recognize the extent to which they are open to prosecution under US law.

How to spot the corruption risks gap

Against this backdrop, automotive organizations should assess their compliance framework from the top down – and bottom up. Because even if a strong corporate code of conduct is in place at the headquarter level, a robust employee behavioral management system may be missing on the ground.

The cost of winning business

14%

of automotive respondents to our latest EY Global Fraud Survey stated it was “common practice” to pay bribes to gain contracts.

Senior executives might intend for the organization to conduct business with integrity. Yet grassroots employees and third-party suppliers are often measured on delivering “success” in pressurized markets, thus threatening their ethical decision-making.

The EY Global Fraud Survey 2018 showed that only 58% of the automotive industry respondents felt that their company had a “tailored risk-based approach to due diligence.

In 2016, a car manufacturer used “desktop calculations” instead of actual field tests to falsify data and prove higher than actual fuel economy. Such systemic compliance failure highlights how overstretched workers may be under pressure to cut costs and speed output.

So, if this sector is to close the gap between announced intentions and actual behavior – or what could be called the “corruption risks gap” – it must recognize that a range of factors, from due diligence to company culture, may be driving it wider.

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Chapter 2

Spotting the warning signs

How to identify emerging risk factors

As the industry continues to evolve in the face of new regulatory requirements, disruptive new entrants, and shifting consumer expectations, two main areas of compliance risk emerging for automotive firms:

1. Supply chain and distribution

When it comes to the origin and destination of its products, risks factors arising for the sector include:

  • Sourcing and purchasing – Cost considerations could lead organizations to source from developing markets where environmental, governance, and health and safety rules do not meet those of their own jurisdiction. New laws are now forcing organizations to consider where and how supplies reach them at the start of the production process.
  • Sales and marketing – As organizations seek new business in a globalized world, they may need to hire agents and distributors in newly emerged markets with less established anti-corruption cultures. The US Foreign Corrupt Practices Act and UK Bribery Act both make the lead organization liable for any corrupt actions of third-parties.
  • Changing international trade rules – Brexit and the ongoing US-China trade war are symptoms of a wider change in attitude towards international trade. This threatens to increase the complexity of trade routes and relationships with foreign suppliers and their governments. 
  • A cross-sector legal landscape – As the sector inherently converges with so many other industries, it faces constantly changing regulations. From cross-border legal and tax differences to shifting attitudes to waste and end-of-life disposal, emissions and air pollution, the regulatory environment are constantly changing for organizations dependent on multinational value chains.

2. Technology and innovation

As new entrants threaten established automotive companies, an extraordinary realignment of R&D and manufacturing alliances are now required, organizations are now realizing they must embrace change and unfamiliar technologies. The risk factors arising from this include:

  • Alternative fuels, electric vehicles, and excessively fast new product introductions – Intellectual property ownership, research and development competencies, health and safety solutions, and testing regimes must be thoroughly assessed.
  • New players in the market – Traditional players increasingly try to develop competitive technology themselves in-house, or in partnership with an existing provider. Trust takes time to develop between partners with different values, ways of working and language. 
  • Self-driving vehicles – Before autonomous vehicles become commercially available, the technological and ethical challenges they represent – such as who should bear liability in the event of traffic accidents involving autonomous vehicles – will need to be addressed. Data privacy and security and cyber protection challenges also need to be considered and addressed.
  • Technology outpacing regulation – While the introduction of new technology may be legal and conducive to freedom of enterprise, its consequences may have broader social and ethical implications. These can fuel public outcry and, most significantly, distrust.

When these new challenges are analyzed more closely, it soon becomes apparent that legal compliance alone will not equip organizations to spot and manage potential risk factors. With so many pressures – and so much uncertainty – the temptation to cut corners on compliance will always be present.

In this context of radical change, compliance needs to be seen not as burdensome, but essential risk management.

Focus on risk

42%

of automotive respondents to our latest Global Fraud Survey felt their company had a “tailored risk-based approach” to due diligence.

Knowledgeable compliance managers and sophisticated data management techniques can help clear the line of sight. They should incorporate a tailored due diligence system that enables companies to detect less visible risks — from origins of materials to conflicts of interest and from criminal records to potentially exposed employees and partners.

Yet closing the corruption risks gap entirely may require a deeper level of insight –and a more rounded approach to risk management.

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Chapter 3

Refocusing on the Integrity Agenda

Closing the corruption risks gap takes more than compliance

Compliance may protect automotive organizations from existing risk, yet the changing legal and technological landscape can present unforeseen social, ethical and commercial outcomes.

This is where the concept of integrity comes in.

Integrity on the agenda

98%

of automotive respondents say it’s important to be able to demonstrate your organization operates with integrity.

To help everyone in the organization – and wider value chain – stay focused on the goal of conducting business in a compliant yet effective manner, the root of every corporate policy should be what we have dubbed the Integrity Agenda. This branches out into every area of the organization and its broader business ecosystem – affecting each decision made by every manager and employee.

Ultimately, an Integrity Agenda acts as a framework for success. It enables organizations to stay true to their missions, respect laws, and ethical norms, and foster public trust in the free enterprise system.

To develop their own Integrity Agenda, organizations should focus their efforts on assessing the governance, corporate culture, and controls from an integrity perspective, and leverage new technologies to provide better insights and measurement. A well-designed Agenda, underpinned by a Digital Integrity Strategy, will focus on four key areas:

  • Governance – Develop an integrity program structure, embedding standards of behavior for employees and third parties acting on the organization’s behalf.
  • Corporate culture – Strengthen the culture that guides day-to-day ways of working and taking decisions, focusing on managing the risks, pressures, and beliefs that influence employee decisions. 
  • Controls – Identify the root causes of integrity failures and improve related policies, procedures, and processes.
  • Data analytics – Embed analytics in digital compliance tools to reveal data-based insight on emerging risks and illegal and unethical conduct, and track improvement in behavior.

By integrating both compliance and integrity into a coherent framework, organizations can unlock a range of competitive advantages. Developing this into a culture and reputation built around integrity, organizations can avoid litigation, win business and partnerships, secure capital and become more attractive for new hires.

In some instances, effective integrity governance programs are increasingly essential. Argentina and Brazil are just two countries with laws in place that determine which companies can engage in public works and compete for public contracts, based on their internal integrity oversight.

To help everyone in the organization – and wider value chain – stay focused on the goal of conducting business in a compliant yet effective manner, the root of every corporate policy should be what we have dubbed the Integrity Agenda. This branches out into every area of the organization and its broader business ecosystem – affecting each decision made by every manager and employee.

Ultimately, an Integrity Agenda acts as a framework for success. It enables organizations to stay true to their missions, respect laws, and ethical norms, and foster public trust in the free enterprise system.

To develop their own Integrity Agenda, organizations should focus their efforts on assessing the governance, corporate culture, and controls from an integrity perspective, and leverage new technologies to provide better insights and measurement. A well-designed Agenda, underpinned by a Digital Integrity Strategy, will focus on four key areas:

  • Governance – Develop an integrity program structure, embedding standards of behavior for employees and third parties acting on the organization’s behalf.
  • Corporate culture – Strengthen the culture that guides day-to-day ways of working and taking decisions, focusing on managing the risks, pressures, and beliefs that influence employee decisions. 
  • Controls – Identify the root causes of integrity failures and improve related policies, procedures, and processes.
  • Data analytics – Embed analytics in digital compliance tools to reveal data-based insight on emerging risks and illegal and unethical conduct, and track improvement in behavior.

By integrating both compliance and integrity into a coherent framework, organizations can unlock a range of competitive advantages. Developing this into a culture and reputation built around integrity, organizations can avoid litigation, win business and partnerships, secure capital and become more attractive for new hires.

In some instances, effective integrity governance programs are increasingly essential. Argentina and Brazil are just two countries with laws in place that determine which companies can engage in public works and compete for public contracts, based on their internal integrity oversight.

Fear of getting caught is a good motivator for tackling corruption. But if a culture of integrity is embedded deep within organizational structures, then the benefits of being a truly fair and transparent player are bigger still.

Summary

By developing an Integrity Agenda, combined with a robust technical and regulatory compliance strategy, automotive companies can turn risk into opportunity and, ultimately, competitive advantage.

About this article

By

Tobias Schumacher

EY Global Sector Leader for Advanced Manufacturing & Mobility, Forensic & Integrity Services

Working on forensic investigations and consulting projects since 1998. 14 years with EY.